Nearly all the research detailed below relies on the generous access to the VentureSource database provided by Dow Jones and Correlation Ventures.
Statistical Discrimination or Prejudice? A Large Sample Field Experiment (with C. Wang and B. Tomlin) [Forthcoming, Review of Economics and Statistics] [pdf]
A model of racial discrimination provides testable implications for two features of statistical discriminators: differential treatment of signals by race and heterogeneous experience that shapes perception. We construct an experiment in the U.S. rental apartment market that distinguishes statistical discrimination from taste-based discrimination. Responses from over 14,000 rental inquiries with varying applicant quality show that landlords treat identical information from applicants with African-American and white sounding names differently. This differential treatment varies by neighborhood racial composition and signal type in a way consistent with statistical discrimination and in contrast to patterns predicted by a model of taste-based discrimination.
The Price of Diversifiable Risk in Venture Capital and Private Equity (with C. Jones and M. Rhodes-Kropf) [Review of Financial Studies, 2013] [pdf]
This paper demonstrates how the principal-agent problem between venture capitalists and their investors (limited partners) causes limited partner returns to depend on diversifiable risk. Our theory shows why the need for investors to motivate VCs alters the negotiations between VCs and entrepreneurs and changes how new firms are priced. The three-way interaction rationalizes the use of high discount rates by VCs and predicts a correlation between total risk and net of fee investor returns. We take our theory to a unique data set and find empirical support for the effect of the principal-agent problem on equilibrium private equity asset prices.
Is the VC Partnership Greater than the Sum of its Partners? (with M. Rhodes-Kropf) [May 2013, Revise and Resubmit] [pdf] [online appendix]
This paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists’ investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner’s human capital is two to five times more important than the VC firm’s organizational capital in explaining performance.
The Consequences of Entrepreneurial Firm Founding on Innovation (with Christian Fons-Rosen) [July 2013] [pdf] [data/code]
This paper studies if and how individual-level patenting activity changes as an employee transitions to entrepreneurial firm founder. Using a large database of employment and innovative histories of over 1110 spinoff firm founders, the empirical strategy tracks both founders and her co-inventors who remain at her previous employer. There are significant changes in patenting focus and quality. Founders are relatively more likely to focus on fewer industry patent classes as the lead patent author, while citing their previous work less. Their patent quality increases after spinoff firm founding in several ways. Non-self citations received increase and the types of patent applications point to a move towards longer-term projects. Finally, we interpret a higher probability of producing a patent in both the right and the left tail of the quality distribution as suggestive evidence of the spinoff firm pursuing riskier projects.
Does Security Choice Matter in Venture Capital? The Case of Venture Debt (with I. Chakraborty) [July 2012] [pdf]
The switch from equity to debt in venture capital-backed entrepreneurial firms is rare, but uniquely informative. Using a novel dataset of financing decisions, we find that entrepreneurial firms that raise debt financing suffer from an average 40% post-debt valuation drop and a 26% lower probability of successful exit (IPO/acquisition). Venture capitalists with equity stakes lend to lower quality entrepreneurial firms compared to outside lenders, and debt from both precedes deterioration in firm quality. Our results do not imply that debt causes negative outcomes. Rather, we argue that debt helps maintain incentive alignment after adverse shocks to firm quality.
Work in Progress
“The Changing Face of the VC-Backed Entrepreneur” (with Ramana Nanda and Matthew Rhodes-Kropf)
“The Effect of Disclosure on Firm Behavior: Evidence from Deregistrations of Small Banks” (with Pierre Lang)