The Broader Impact of Venture Capital on Innovation: Reducing Entrepreneurial Capability Constraints Through Due Diligence
Posted: 25 Jul 2023 Last revised: 26 Dec 2023
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
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