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Tyranny of the Personal Network: The Limits of Arm’s Length Fundraising in Venture Capital

Author

Listed:
  • Sabrina T. Howell
  • Dean Parker
  • Ting Xu

Abstract

Growing retail participation in private markets causes private fundraising to shift from relationship-based to arm’s length. Focusing on venture capital funds, we study a 2013 policy—the 506(c) exemption—permitting public advertising in private markets. 506(c) funds have more retail investors and managers with weaker networks, yet do not underperform. Advertising reduces search costs and enables more catering to investor preferences. Nonetheless, 506(c) take-up is limited because arm’s length fundraising depends on hard information, but few managers establish a track record without developing a strong network. Institutional investors also consider 506(c) a negative signal because they avoid co-investing with retail.

Suggested Citation

  • Sabrina T. Howell & Dean Parker & Ting Xu, 2024. "Tyranny of the Personal Network: The Limits of Arm’s Length Fundraising in Venture Capital," NBER Working Papers 33080, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33080
    Note: CF LE PR
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination

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