Venture Capitalist Signaling of Screening Skill

Abstract

This study examines whether VCs signal their skill in screening investments accurately, in order to influence the quality of their deal flow. A theoretical model, based on a market comprising investors and entrepreneurs, each having two levels of quality, is developed to establish the value of such signals to entrepreneurs receiving them and to investors generating them. This is followed by an empirical exploration of data from 41 VCs in Canada, the U.S., and the U.K., which leads to the identification of two specific observable signals of VC screening skill: the independence of their investment activities and the relationships they maintain with stakeholders. These results suggest that successfully investing in early-stage firms is a signal of VC screening skill.

TOPICS: Private equity, manager selection, developed, quantitative methods