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Due Diligence and the Allocation of Venture Capital

Author

Listed:
  • Xiaoyong (Jack) Fu
  • Lucian A. Taylor

Abstract

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. This measure captures one important component of 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.

Suggested Citation

  • Xiaoyong (Jack) Fu & Lucian A. Taylor, 2025. "Due Diligence and the Allocation of Venture Capital," NBER Working Papers 33987, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33987
    Note: CF
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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