Working Paper: NBER ID: w23874
Authors: Sabrina T. Howell
Abstract: Venture capital, an important source of financing for potentially high-growth new businesses, is believed to suffer from information frictions. This paper quantifies the magnitude of these frictions among participants in new venture competitions. In a regression discontinuity design with data from 87 competitions, winning a round increases the chances of external financing by about 35 percent. Winning is most impactful for ventures ranked just above the cutoff but that receive no cash prize, and judge ranks strongly predict venture success. The results indicate that information problems in new venture finance are large, and competitions can help resolve them through certification.
Keywords: venture capital; information frictions; new venture competitions; financing; certification
JEL Codes: G24; G4; L1; L2; L26; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Winning a competition (D44) | Increased chances of raising external finance (G24) |
| Winning a competition (D44) | Certification serves as an important mechanism (Q48) |
| Winning a competition (without cash prizes) (D44) | Enhanced likelihood of financing (G32) |
| Judge ranks (K40) | Predictive of success (C52) |
| Winning a competition (D44) | Enhanced likelihood of long-term success outcomes (I24) |
| Winning a competition (D44) | Alleviating information frictions (D83) |
| Winning a competition (D44) | Increased chances of raising external finance (for internet/software ventures) (O36) |