Rush to Raise: Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?

47 Pages Posted: 24 May 2021 Last revised: 3 Jun 2021

See all articles by Peter K. Pham

Peter K. Pham

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 22, 2021

Abstract

We provide evidence that venture capitalists (VCs) strategically enhance their current funds’ interim performance around new fundraising events. Using novel investment-round-level pricing data, we document that, immediately prior to raising another fund, VCs tend to invest in follow-on financing rounds of their existing portfolio firms at abnormally high step-ups in valuation, relative to subsequent follow-on rounds at the same firms. This pattern cannot be explained by deal and investor characteristics, and strengthens when multiple VCs in the syndicate concurrently raise new funds. Investing at high round prices translates into higher quarterly portfolio IRRs reported at the fund level. Overall, our results question the veracity of portfolio valuations based on investment-round pricing, especially when the VC is under the pressure to raise a new fund.

Keywords: Venture Capital; Private Valuation; Fundraising

JEL Classification: G24; G32

Suggested Citation

Pham, Peter Kien and Turner, Nick and Zein, Jason, Rush to Raise: Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing? (May 22, 2021). Available at SSRN: https://ssrn.com/abstract=3851819 or http://dx.doi.org/10.2139/ssrn.3851819

Peter Kien Pham

Institute of Global Finance, UNSW Business School ( email )

UNSW Business School
High St
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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