Joint with Jack (Xiaoyong) Fu
Nov. 2024
How do investors choose the intensity of their due diligence, and how does that choice affect investment outcomes? Using cell phone signal data, we measure the duration of pre-investment meetings between venture capitalists (VCs) and startup employees, and we use this measure as a proxy for VC due diligence. Less due diligence is associated with hotter deals and markets, busier investors, and greater distance, consistent with a theory of costly learning. Also consistent with that theory, less due diligence is associated with more volatile investment performance, as VCs allocate capital under greater uncertainty. Overall, VCs appear to trade off the costs of due diligence with its improvements to capital allocation.