Tyranny of the Personal Network: The Limits of Arm’s Length Fundraising in Venture Capital

Sabrina T. Howell, Dean Parker and Ting Xu

No 33080, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The central tension in securities regulation is between protecting investors and enabling broad capital formation. Focusing on VC fund managers, we study key tools of investor protection in private markets: enforcing relationship-based fundraising and restricting eligible investors. A new policy permitting public advertising is disproportionately used by less well-networked, underrepresented fund managers and is less sensitive to local conditions. Yet it has limited take-up because track record matters at arm’s length while strong networks matter in relationship financing; underrepresented managers more often have neither. Arm’s length fundraising also imposes costs to accessing the “crowd” and verifying investors, inducing negative signaling.

JEL-codes: G21 G23 G32 J15 J16 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-lab, nep-pay and nep-soc
Note: CF LE PR
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