The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment

We examine whether venture capitalists contribute to the innovation and success of their portfolio companies, or merely select companies that are already poised to innovate and succeed. To do so, we exploit exogenous reductions in monitoring costs stemming from the introduction of new airline routes between venture capital firms and their existing portfolio companies. Within an existing relationship, we find that reductions in travel time are associated with an increase in the number of patents and number of citations per patent of the portfolio company, as well as an increase in the likelihood of an eventual IPO or acquisition. These results are robust when controlling for local shocks that could potentially drive the introduction of the new airline routes. We further document that the effect is concentrated in routes that connect lead VCs with portfolio companies, as opposed to other investors. Overall, these results are consistent with the monitoring channel and hence indicate that venture capitalists' physical presence at their portfolio companies is an important determinant of innovation and success.