Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?
66 Pages Posted: 24 May 2021 Last revised: 29 Jan 2023
Date Written: May 21, 2021
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
Suggested Citation: Suggested Citation