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: Growing retail participation in private markets causes private fundraising to shift from relationship-based to arm’s length. Focusing on venture capital funds, we study a 2013 policy—the 506(c) exemption—permitting public advertising in private markets. 506(c) funds have more retail investors and managers with weaker networks, yet do not underperform. Advertising reduces search costs and enables more catering to investor preferences. Nonetheless, 506(c) take-up is limited because arm’s length fundraising depends on hard information, but few managers establish a track record without developing a strong network. Institutional investors also consider 506(c) a negative signal because they avoid co-investing with retail.

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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