How Does VC Activism Backfire in Startup Experimentation?

64 Pages Posted: 6 Aug 2024

See all articles by Xuelin Li

Xuelin Li

Columbia University

Sijie Wang

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics

Jiajie Xu

University of Iowa - Henry B. Tippie College of Business

Xiang Zheng

University of Connecticut - Department of Finance

Date Written: July 01, 2024

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.

Suggested Citation

Li, Xuelin and Wang, Sijie and Xu, Jiajie and Zheng, Xiang, How Does VC Activism Backfire in Startup Experimentation? (July 01, 2024). Available at SSRN: https://ssrn.com/abstract=4912335 or http://dx.doi.org/10.2139/ssrn.4912335

Xuelin Li (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Sijie Wang

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China

Jiajie Xu

University of Iowa - Henry B. Tippie College of Business ( email )

Pappajohn Business Building S296
Iowa City, IA 52242-1000
United States

HOME PAGE: http://www.jiajiexu.com/

Xiang Zheng

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

HOME PAGE: http://www.xiangzheng.info/

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