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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

U.S. securities regulators have sought to protect investors in private markets by forcing issuers to fundraise via personal networks. Focusing on VC fund managers, we study a 2013 policy permitting public advertising in private markets (“506(c)”). Less well-networked and underrepresented managers disproportionately use 506(c). Yet its take-up is limited because arm’s length fundraising depends on hard information, especially a track record, and few managers establish a track record without developing a network. Arm’s length fundraising also imposes costs—to access the “crowd” and verify investors—leading it to send a negative signal.

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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