No CrossRef data available.
Article contents
Busy Venture Capitalists and Investment Performance
Published online by Cambridge University Press: 07 April 2025
Abstract
This paper studies the impact of limited attention on investment decisions by venture capitalists (VCs). I find that startups funded by VCs during VCs’ IPO engagements tend to underperform: These startups are 9% less likely to go public or become acquired and have lower exit multiples. The effects of VCs’ busyness cluster around the active phase of the IPO engagement and are more pronounced in cases of higher workload intensity or higher information asymmetry. Overall, this performance gap induced by attention constraints provides new evidence on VCs’ ability to identify investment opportunities at the initial screening stage.
- Type
- Research Article
- Information
- Copyright
- © The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
I thank an anonymous referee, Ran Duchin (the editor), Shai Bernstein, Alon Brav, Max Couvert, Mike Ewens, Rüdiger Fahlenbrach, Joan Farre-Mensa, Marc Frattaroli, Laurent Frésard, Xavier Giroud, Will Gornall, Christoph Herpfer, Sabrina Howell, Elisabeth Kempf, Katja Kisseleva, Josh Lerner, Marc Lipson, Michelle Lowry, Elena Loutskina, Song Ma, Gregor Matvos, Maurice McCourt, Ramana Nanda, Boris Nikolov, Jay Ritter, David Robinson, Nick Roussanov, Morten Sørensen, Luke Stein, Roberto Steri, Ilya Strebulaev, Geoffrey Tate, Davide Tomio, Ting Xu, David Yermack, Jonathan Zandberg, and conference and seminar participants at BI Oslo, Copenhagen Business School, HEC Lausanne, HKU Business School, IE Business School, Tilburg, University of Amsterdam, University of Geneva, University of Iowa, UVA Darden, VU Amsterdam, Annual Private Capital Conference (Montreux), FMA (New Orleans), KWC Conference on Entrepreneurial Finance, PERC Private Equity Research Symposium (Oxford), and SFS Cavalcade North America 2020 for valuable discussions and comments. Part of this research was written while I visited Stanford GSB. A previous version was titled “The Impact of Venture Capital Screening.” All errors are my own.
References
Admati, A. R., and Pfleiderer, P.. “Robust Financial Contracting and the Role of Venture Capitalists.” Journal of Finance, 49 (1994), 371–402.CrossRefGoogle Scholar
Barber, B., and Odean, T.. “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.” Journal of Finance, 55 (2000), 773–806.CrossRefGoogle Scholar
Barry, C.; Muscarella, C.; Peavy, J.; and Vetsuypens, M.. “The Role of Venture Capital in the Creation of Public Companies: Evidence from the Going-Public Process.” Journal of Financial Economics, 27 (1990), 447–471.CrossRefGoogle Scholar
Ben-Rephael, A.; Da, Z.; and Israelsen, R. D.. “It Depends on Where You Search: Institutional Investor Attention and Underreaction to News.” Review of Financial Studies, 30 (2017), 3009–3047.CrossRefGoogle Scholar
Benninga, S.; Helmatel, M.; and Sarig, O.. “The Timing of Initial Public Offerings.” Journal of Financial Economics, 75 (2005), 115–132.Google Scholar
Bernstein, S. “Does Going Public Affect Innovation?” Journal of Finance, 70 (2015), 1365–1403.CrossRefGoogle Scholar
Bernstein, S.; Giroud, X.; and Townsend, R.. “The Impact of Venture Capital Monitoring.” Journal of Finance, 71 (2016), 1591–1622.CrossRefGoogle Scholar
Bernstein, S.; Korteweg, A.; and Laws, K.. “Attracting Early-Stage Investors: Evidence from a Randomized Field Experiment.” Journal of Finance, 72 (2017), 509–538.CrossRefGoogle Scholar
Bernstein, S.; Lerner, J.; and Mezzanotti, F.. “Private Equity and Financial Fragility during the Crisis.” Review of Financial Studies, 32 (2019), 1309–1373.CrossRefGoogle Scholar
Boeker, W., and Wiltbank, R.. “Returns to Angel Investors in Groups.” Working Paper, available at https://ssrn.com/abstract=1028592 (2007).CrossRefGoogle Scholar
Brav, A., and Heaton, J.. “Competing Theories of Financial Anomalies.” Review of Financial Studies, 15 (2002), 575–606.CrossRefGoogle Scholar
Brown, G.; Gredil, O.; and Kaplan, S. N.. “Do Private Equity Funds Manipulate Reported Returns?” Journal of Financial Economics, 132 (2019), 267–297.CrossRefGoogle Scholar
BVCA. Guide to Executing a Successful IPO. British Private Equity & Venture Capital Association (2014).Google Scholar
Caplin, A., and Dean, M.. “Revealed Preference, Rational Inattention, and Costly Information Acquisition.” American Economic Review, 105 (2015), 2183–2203.Google Scholar
Daniel, K., and Hirshleifer, D.. “Overconfident Investors, Predictable Returns, and Excessive Trading.” Journal of Economic Perspectives, 29 (2015), 61–88.CrossRefGoogle Scholar
Doidge, C.; Karolyi, A.; and Stulz, R.. “The U.S. Listing Gap.” Journal of Financial Economics, 123 (2017), 464–487.CrossRefGoogle Scholar
Draper, W. H. The Startup Game: Inside the Partnership Between Venture Capitalists and Entrepreneurs. London, United Kingdom: Palgrave Macmillan (2012).Google Scholar
Ewens, M., and Farre-Mensa, J.. “The Deregulation of the Private Equity Markets and the Decline in IPOs.” Review of Financial Studies, 33 (2020), 5463–5509.CrossRefGoogle Scholar
Ewens, M., and Malenko, N.. “Board Dynamics over the Startup Life Cycle.” NBER Working Paper No. 27769 (2022).Google Scholar
Ewens, M., and Marx, M.. “Founder Replacement and Startup Performance.” Review of Financial Studies, 31 (2018), 1532–1565.CrossRefGoogle Scholar
Ewens, M.; Nanda, R.; and Rhodes-Kropf, M.. “Cost of Experimentation and the Evolution of Venture Capital.” Journal of Financial Economics, 128 (2018), 422–442.CrossRefGoogle Scholar
Ewens, M., and Rhodes-Kropf, M.. “Is a VC Partnership Greater Than the Sum of Its Partners?” Journal of Finance, 70 (2015), 1081–1113.CrossRefGoogle Scholar
Falato, A.; Kadyrzhanova, D.; and Lel, U.. “Distracted Directors: Does Board Busyness Hurt Shareholder Value?” Journal of Financial Economics, 113 (2014), 404–426.Google Scholar
Field, L.; Lowry, M.; and Mkrtchyan, A.. “Are Busy Boards Detrimental?” Journal of Financial Economics, 109 (2013), 63–82.Google Scholar
Fu, J. “How Can Monitoring Benefit Investors? Evidence from 85 Billion Cell Phone Signals.” Working Paper, University of Pennsylvania (2024).Google Scholar
Gibbons, B. “Public Market Information and Venture Capital Investment.” Journal of Financial and Quantitative Analysis, 58 (2023), 746–776.Google Scholar
Gompers, P.; Gornall, W.; Kaplan, S.; and Strebulaev, I.. “How Do Venture Capitalists Make Decisions?” Journal of Financial Economics, 135 (2020), 169–190.CrossRefGoogle Scholar
Gompers, P.; Kaplan, S.; and Mukharlyamov, V.. “What Do Private Equity Firms Say They Do?” Journal of Financial Economics, 121 (2016), 449–476.CrossRefGoogle Scholar
Gompers, P., and Lerner, J.. The Venture Capital Cycle. Cambridge, MA: MIT Press (1999).Google Scholar
Gompers, P. A. “Grandstanding in the Venture Capital Industry.” Journal of Financial Economics, 42 (1996), 133–156.CrossRefGoogle Scholar
González-Uribe, J. “Exchanges of Innovation Resources Inside Venture Capital Portfolios.” Journal of Financial Economics, 135 (2020), 144–168.CrossRefGoogle Scholar
Hauser, R. “Busy Directors and Firm Performance: Evidence from Mergers.” Journal of Financial Economics, 128 (2018), 16–37.CrossRefGoogle Scholar
Hellman, T., and Puri, M.. “The Interaction between Product Market and Financing Strategy: The Role of Venture Capital.” Review of Financial Studies, 13 (2000), 959–984.CrossRefGoogle Scholar
Hirshleifer, D.; Lim, S.; and Teoh, S.. “Driven to Distraction: Extraneous Events and Underreaction to Earnings News.” Journal of Finance, 64 (2009), 2289–2325.CrossRefGoogle Scholar
Hochberg, Y. V.; Ljungqvist, A.; and Lu, Y.. “Whom You Know Matters: Venture Capital Networks and Investment Performance.” Journal of Finance, 62 (2007), 251–301.CrossRefGoogle Scholar
Howell, S. “Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions.” Journal of Financial Economics, 136 (2020), 676–694.Google Scholar
Inderst, R., and Muller, H.. “The Effect of Capital Market Characteristics on the Value of Start-Up Firms.” Journal of Financial Economics, 72 (2004), 319–356.Google Scholar
Jääskeläinen, M.; Maula, M.; and Seppa, T.. “Allocation of Attention to Portfolio Companies and the Performance of Venture Capital Firms.” Entrepreneurship Theory and Practice, 30 (2006), 185–206.CrossRefGoogle Scholar
Kacperczyk, M.; Nieuwerburgh, S. V.; and Veldkamp, L.. “Time-Varying Fund Manager Skill.” Journal of Finance, 69 (2014), 1455–1484.CrossRefGoogle Scholar
Kaplan, S.; Sørensen, M.; and Zakolyukina, A.. “What Is CEO Overconfidence? Evidence from Executive Assessments.” Journal of Financial Economics, 145 (2022), 409–425.CrossRefGoogle Scholar
Kaplan, S. N., and Strömberg, P.. “Venture Capitalists as Principals: Contracting, Screening, and Monitoring.” American Economic Review, 91 (2001), 426–430.CrossRefGoogle Scholar
Kaplan, S. N., and Strömberg, P.. “Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts.” Review of Economic Studies, 70 (2003), 281–315.Google Scholar
Katz, L., and Sahlman, W.. “Amazon.com - Going Public.” Harvard Business Case 9-899-003 (1999).Google Scholar
Kempf, E.; Manconi, A.; and Spalt, O.. “Distracted Shareholders and Corporate Actions.” Review of Financial Studies, 30 (2017), 1660–1695.CrossRefGoogle Scholar
Kerr, W.; Nanda, R.; and Rhodes-Kropf, M.. “Entrepreneurship as Experimentation.” Journal of Economic Perspectives, 28 (2014), 25–48.CrossRefGoogle Scholar
Lerner, J. “Venture Capitalists and the Decision to Go Public.” Journal of Financial Economics, 35 (1994), 293–316.Google Scholar
Lerner, J. “Venture Capitalists and the Oversight of Private Firms.” Journal of Finance, 50 (1995), 301–318.CrossRefGoogle Scholar
Li, X.; Liu, T.; and Taylor, L.. “Common Ownership and Innovation Efficiency.” Journal of Financial Economics, 147 (2023), 475–497.CrossRefGoogle Scholar
Lindsey, L. “Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances.” Journal of Finance, 63 (2008), 1137–1168.CrossRefGoogle Scholar
Lowry, M., and Schwert, W.. “IPO Market Cycles: Bubbles or Sequential Learning?” Journal of Finance, 57 (2002), 1171–1200.Google Scholar
Lu, Y.; Ray, S.; and Teo, M.. “Limited Attention, Marital Events and Hedge Funds.” Journal of Financial Economics, 122 (2016), 607–624.CrossRefGoogle Scholar
Lyonnet, V., and Stern, L.. “Venture Capital (Mis)Allocation in the Age of AI.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4260882 (2022).CrossRefGoogle Scholar
Ma, S., and Hu, A.. “Persuading Investors: A Video-Based Study.” Journal of Finance , forthcoming (2024).Google Scholar
Malenko, A.; Nanda, R.; Rhodes-Kropf, M.; and Sundaresan, S.. “Catching Outliers: Committee Voting and the Limits of Consensus when Financing Innovation.” Harvard Business School Entrepreneurial Management Working Paper No. 21-131 (2024).Google Scholar
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 2661–2700.CrossRefGoogle Scholar
Matejka, F., and McKay, A.. “Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model.” American Economic Review, 105 (2015), 272–298.CrossRefGoogle Scholar
Maurin, V.; Robinson, D.; and Strömberg, P.. “A Theory of Liquidity in Private Equity.” Management Science, 69 (2023), 5740–5771.CrossRefGoogle Scholar
Megginson, W. L., and Weiss, K. A.. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance, 46 (1991), 879–903.CrossRefGoogle Scholar
Metrick, A., and Yasuda, A.. Venture Capital and the Finance of Innovation. New York, NY: Wiley (2011).Google Scholar
Nanda, R., and Rhodes-Kropf, M.. “Investment Cycles and Startup Innovation.” Journal of Financial Economics, 110 (2013), 403–418.Google Scholar
Nanda, R.; Samila, S.; and Sorenson, O.. “The Persistent Effect of Initial Success: Evidence from Venture Capital.” Journal of Financial Economics, 137 (2020), 231–248.Google Scholar
Quindlen, R. Confessions of a Venture Capitalist: Inside the High-Stakes World of Start-Up Financing. New York, NY: Business Plus (2001).Google Scholar
Robinson, D. T., and Sensoy, B. A.. “Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance.” Review of Financial Studies, 26 (2013), 2760–2797.CrossRefGoogle Scholar
Scott, E.; Shu, P.; and Lubynsky, R.. “Entrepreneurial Uncertainty and Expert Evaluation: An Empirical Analysis.” Management Science, 66 (2020), 1278–1299.CrossRefGoogle Scholar
Shontell, A. “I Blew It: 11 VCs Regret the Huge Companies They Said ‘No’ To.” Business Insider (Aug. 8, 2011).Google Scholar
Shu, T.; Tian, X.; and Zhan, X.. “Patent Quality, Firm Value, and Investor Underreaction: Evidence from Patent Examiner Busyness.” Journal of Financial Economics, 143 (2022), 1043–1069.Google Scholar
Sims, C. “Implications of Rational Attention.” Journal of Monetary Economics, 50 (2003), 665–690.Google Scholar
Sørensen, M. “How Smart Is Smart Money? A Two-Sided Matching Model of Venture Capital.” Journal of Finance, 62 (2007), 2725–2762.CrossRefGoogle Scholar
Townsend, R. “Propagation of Financial Shocks: The Case and Venture Capital.” Management Science, 61 (2015), 2782–2802.CrossRefGoogle Scholar
Van Nieuwerburgh, S., and Veldkamp, L.. “Information Acquisition and Under-Diversification.” Review of Economic Studies, 22 (2010), 779–805.CrossRefGoogle Scholar
Wang, D.; Pahnke, E.; and McDonald, R.. “The Past Is Prologue? Venture-Capital Syndicates’ Collaborative Experience and Start-Up Exits.” Academy of Management Journal, 65 (2022), 371–402.CrossRefGoogle Scholar
Yasmine, F. “Naval Ravikant: Twitter, Bubbles, New York and Start Fund.” The Next Web (2011).Google Scholar
Abuzov supplementary material
Abuzov supplementary material
File
382.7 KB