Partisanship in Venture Capital

Abstract

I study the effect of partisanship in the venture capitalist (VC) industry. In particular, I examine whether VCs' investment decisions and outcomes are affected if the VC general partners lean towards the same political party as the startup founder/CEO. I use political contribution and voter registration data together to identify their political leaning. On the extensive margin, VCs increase their chance of investing in aligned startups by about one fifth. On the intensive margin, VCs increase the deal size by \$0.9 million on average per deal, and are more likely to raise startup's valuation. This evidence supports the favoritism between investors and investees within same political party. Startups sharing same party leaning with their VC partners have better exit outcomes and lower failure rates, implying the existence of information advantage channel. I also utilize VC partner death as exogenous shock that breaks the connections to provide causal evidence of the partisanship effect on startup outcomes. To further explore the VC value-adding mechanism, I show that VC partners who politically in line with startup CEOs are more likely to invest in the future financing rounds given existence of current aligned partners. 

Keywords: Partisanship, Venture Capital