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Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions

Sabrina T. Howell

NBER Working Paper No. 23874
Issued in September 2017, Revised in January 2019
NBER Program(s):Corporate Finance, Industrial Organization, Productivity, Innovation, and Entrepreneurship

Venture capital, an important source of financing for potentially high-growth new businesses, is believed to suffer from information frictions. This paper quantifies the magnitude of these frictions among participants in new venture competitions. In a regression discontinuity design with data from 87 competitions, winning a round increases the chances of external financing by about 35 percent. Winning is most impactful for ventures ranked just above the cutoff but that receive no cash prize, and judge ranks strongly predict venture success. The results indicate that information problems in new venture finance are large, and competitions can help resolve them through certification.

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Document Object Identifier (DOI): 10.3386/w23874

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