VC Participation and Failure of Startups: Evidence from P2p Lending Platforms in China

Abstract

We investigate how VC participation affects the failure of startups. Using a unique data set of the survival of peer-to-peer (P2P) platforms in China, we identify two types of failures, bankruptcy, and run off with investors’ money. The Competing Risk Model results show that while VC participation reduces bankruptcy hazard, it has little impact on the runoff failures. The findings are robust to the use of matched sub-samples that disentangle the influence of pre-investment screening by VC. Further analysis of exit routes reveals that conditional on failure, VC participation is associated with a higher chance of running for the exit.

Keywords: Venture Capital, Startup; P2P Platform, Corporate Failure

JEL Classification: G21, G23, G24, G33