Finance and Accounting Research Seminar with Xuelin Li

How Does VC Specialization Backfire in Startup Experimentation?

Prior research suggests that specialized VC funds with small portfolios benefit startup performance due to active investor engagement. Using project-level data from the life science sector, we investigate this argument through a novel channel of VC activism: the strategic decision of project prioritization. We document that despite more interactions from smaller and more focused VCs, their biotech startups are less likely to exit via IPOs. Consistent with such activism prematurely prioritizing the research pipeline, startups backed by concentrated VCs exhibit slower progress in clinical trials and tend to discontinue projects due to pipeline priority rather than other reasons. For identification, we use limited partners' adoption of ESG objectives as instruments for affected VCs' portfolio size and diversification. Lastly, we highlight conflicting experimentation preferences between general partners and founding teams due to investment horizon and portfolio cannibalization.