Venture Capital Start-up Selection

We study venture capital (VC) selection using the deal flow and investment decisions for more than 8,000 sourced deals from one early-stage VC in detail. The (unconditional) likelihood that a sourced start-up raises at least $1 million in VC funding from some VC firm is roughly 30%. The deals the VC scored and invested in perform better than the deals the VC scored and did not invest which perform better than the deals the VC did not score, suggesting that the VC has selection ability. At the same time, the selection is noisy as only 32% (13%) of the invested firms have raised more than $10 ($25) million in VC funding. The VC evaluated the deals it scored on team, market, product and exit characteristics. Team is most successful at explaining VC funding of at least $1 million, but does not explain larger financings or success. Market and product have more explanatory power for VC funding of more than $10, $25 and $50 million as well as longer term outcomes. Consistent with other recent work, this is consistent with VCs overweighting team in their initial investment decision.