Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?

Abstract

Using novel round-level pricing data, we show that startup investment-round valuations are distorted by venture capitalists' fundraising incentives. Before raising another fund, VCs strategically invest in follow-on rounds of current portfolio firms at high price step-ups, creating abnormal peaks in a startup's valuation trajectory and temporarily raising a VC's current-fund performance. This pattern cannot be fully explained by round, firm, and VC characteristics, nor by the strategic timing of fundraising to follow portfolio-firm success. Non-fundraising syndicate members support highly-priced rounds of fundraising VCs to reciprocate previous favors. Our results question the veracity of round-based valuation as an interim performance measure.

Keywords: Venture Capital; Private Valuation; Fundraising

JEL Classification: G24; G32