How Venture Capitalists and Startups Bet on Each Other: Evidence From an Experimental System

Abstract

The entrepreneurial financing process is essentially a two-sided matching process between investors and startups. This paper implements two symmetric incentivized resume rating (IRR) experiments with real US venture capitalists and US startup founders to elicit their preferences for potential collaborators. Experimental subjects evaluate randomized profiles of potential collaborators and these evaluation results are incentivized by real opportunities of being matched with their dream cooperation partners. On the investor side, we find both startups' human assets (i.e., educational background, entrepreneurial experiences) and non-human assets (i.e., traction, business model, location, comparative advantages) causally affect investors' contact interest and investment interest through influencing their evaluations of startups' potential financial returns, risk, and availability. On the startup side, we find both investors' human capital (i.e., entrepreneurial experiences, years of investment experiences) and funds' organizational capital (i.e., previous financial performance, fund size) causally affect startups' collaboration interest and fundraising plans through influencing startups' judgements on the investor's quality, potential investment interest, and the investor profiles' informativeness. The magnitudes of these collaboration preferences also vary in different market conditions and across the spectrum of the quality of startups and investors. Our experimental system provides a micro-level empirical foundation to decipher the matching process between investors and founders in the US. This is crucial to explain both startups' fundraising outcomes and VC funds' financial performances, especially the performance persistence, through the sorting channel.

Keywords: Venture Capital, Entrepreneurship, Portfolio Selection Criteria, Fundraising Behaviors, Field Experiments, Matching, Preference

JEL Classification: C78, C93, D83, G24, G40, J71