Due Diligence and the Allocation of Venture Capital

Xiaoyong (Jack) Fu and Lucian A. Taylor

No 33987, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using smartphone geolocation data, we construct a direct, large-sample proxy for due diligence: the hours venture capitalists (VCs) and startup employees spend meeting in person before financing rounds. Less diligence is associated with hotter markets, greater distances, and busier, more-experienced investors, consistent with a model in which VCs trade off the costs and benefits of learning. As predicted, deals with less diligence show greater dispersion in marginal products of capital—an indicator of misallocation—but not lower average performance. Aggregate misallocation is higher in hotter markets. Our model-based estimates imply that doubling diligence would create value worth 2% to 6% of capital invested.

JEL-codes: E22 G11 G24 (search for similar items in EconPapers)
Date: 2025-07
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