Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?

Abstract

Using novel round-level pricing data, we show that VC investment pricing decisions are distorted by fundraising incentives. Before raising another fund, VCs boost interim performance by strategically investing in follow-on rounds of current portfolio firms at abnormally high valuations. This pattern cannot be fully explained by startup and VC characteristics, nor by the strategic timing of fundraising to follow portfolio-firm success. Strategic overpricing is more apparent when quid pro quo relationships exist within VC syndicates and when LPs are inexperienced. Since overpricing reduces realized returns to current-fund LPs, our findings uncover a new dimension of the GP-LP agency conflict.

Keywords: Venture Capital; Private Valuation; Fundraising

JEL Classification: G24; G32