How Does VC Activism Backfire in Startup Experimentation?

Abstract

We utilize granular data from the life science sector to study how VC activism affects strategic experimentation decisions. We show that pipeline prioritization, deciding the timing and selection of projects to advance, is prevalent in startup growth. Despite more interactions from smaller and more focused VCs, biotech startups invested by them are less likely to exit via IPOs. Consistent with such activism prematurely prioritizing the research pipeline, startups backed by concentrated VCs exhibit slower progress in clinical trials and tend to discontinue projects due to pipeline priority rather than financial and quality reasons. For identification, we use limited partners' adoption of ESG objectives as instruments for affected VCs' portfolio attention. Lastly, we highlight conflicting experimentation preferences between general partners and founding teams due to investment horizon and portfolio cannibalization.