The Broader Impact of Venture Capital on Innovation: Reducing Entrepreneurial Capability Constraints Through Due Diligence

Posted: 25 Jul 2023 Last revised: 26 Dec 2023

See all articles by Juanita Gonzalez-Uribe

Juanita Gonzalez-Uribe

London School of Economics & Political Science (LSE) - Department of Finance

Robyn Klingler-Vidra

King’s Business School, King’s College London

Su Wang

ShanghaiTech University, School of Entrepreneurship and Management

Xiang Yin

Tsinghua University, SEM

Date Written: July 21, 2023

Abstract

We examine the value added by venture capital investors during the due-diligence process. We use data from a seed fund that quasi-randomly assigns applicants to due diligence, creating a natural experiment. We find that due-diligence assignment leads to higher average growth, even for companies rejected for investment by the fund. However, the effect on growth is concentrated on the upper quantiles of the growth distribution while business discontinuation increases. These results suggest that venture capital due diligence can mitigate entrepreneurial capability constraints in determining whether and how to expand promising ideas and shut down unproductive businesses.

Keywords: Due Diligence, High-Growth Entrepreneurship, Entrepreneurial Capabilities Constraints, Innovation, Startup, Venture Capital.

JEL Classification: G24, L26, M13

Suggested Citation

Gonzalez-Uribe, Juanita and Klingler-Vidra, Robyn and Wang, Su and Yin, Xiang, The Broader Impact of Venture Capital on Innovation: Reducing Entrepreneurial Capability Constraints Through Due Diligence (July 21, 2023). Available at SSRN: https://ssrn.com/abstract=4516863 or http://dx.doi.org/10.2139/ssrn.4516863

Juanita Gonzalez-Uribe

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom
+442074057686 (Phone)

Robyn Klingler-Vidra

King’s Business School, King’s College London ( email )

150 Stamford Street
London, SE1 9NH
United Kingdom

Su Wang (Contact Author)

ShanghaiTech University, School of Entrepreneurship and Management ( email )

393 Middle Huaxia Road, Pudong
Shanghai, 201210
China

Xiang Yin

Tsinghua University, SEM ( email )

Beijing
China

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