Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?

66 Pages Posted: 24 May 2021 Last revised: 29 Jan 2023

See all articles by Peter K. Pham

Peter K. Pham

University of Sydney Business School; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Nick Turner

UNSW Business School

Jason Zein

UNSW Business School; Financial Research Network (FIRN)

Date Written: May 21, 2021

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

Suggested Citation

Pham, Peter Kien and Turner, Nick and Zein, Jason, Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing? (May 21, 2021). Available at SSRN: https://ssrn.com/abstract=3851819 or http://dx.doi.org/10.2139/ssrn.3851819

Peter Kien Pham

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9036 9103 (Phone)
+61 2 9351 6461 (Fax)

Institute of Global Finance, UNSW Business School ( email )

UNSW Business School
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Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Nick Turner

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Jason Zein (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93855858 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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