Working Paper: NBER ID: w31897
Authors: Josh Lerner; Jinlin Li; Tong Liu
Abstract: This paper studies how investing in venture capital (VC) affects the entrepreneurial outcomes of individual limited partners (LPs). Using comprehensive administrative data on entrepreneurial activities and VC fundraising and investments in China, we first document that individual LPs, on average, contribute about 50% of the capital of each fund in which they participate, and over 50% of them are entrepreneurs. We then exploit an identification strategy by comparing the entrepreneurial outcomes of individual LPs in funds that eventually launched with those in funds that failed to launch. The fraction of committed capital from corporate LPs in industries that subsequently encounter poor returns is used as an instrument for funds’ launch failures. We find that after investing in a successfully launched VC fund, individual LPs create significantly more ventures than do LPs in funds which failed to launch. These new ventures tend to be high-tech firms and file more patents than do the LPs’ prior ventures. We find evidence consistent with venture investments being a channel through which individual LPs learn.
Keywords: venture capital; entrepreneurial spillovers; limited partners; high-tech firms; patent filing
JEL Codes: D83; G23; G24; L25; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investing in successfully launched VC funds (G24) | Entrepreneurial activities of individual limited partners (L26) |
| Failure of VC fund to launch (G24) | Entrepreneurial activities of individual limited partners (L26) |
| Financial distress of corporate LPs (G33) | Likelihood of fund launch (G23) |
| Industry conditions affecting corporate LPs (L19) | Entrepreneurial activities of individual LPs (L26) |
| Higher-quality general partners (L15) | Entrepreneurial spillover effect for LPs (L26) |
| First-time LPs (Y20) | Stronger entrepreneurial spillover effect (L26) |