Rush to Raise: Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?

Abstract

We provide evidence that venture capitalists (VCs) strategically enhance their current funds’ interim performance around new fundraising events. Using novel investment-round-level pricing data, we document that, immediately prior to raising another fund, VCs tend to invest in follow-on financing rounds of their existing portfolio firms at abnormally high step-ups in valuation, relative to subsequent follow-on rounds at the same firms. This pattern cannot be explained by deal and investor characteristics, and strengthens when multiple VCs in the syndicate concurrently raise new funds. Investing at high round prices translates into higher quarterly portfolio IRRs reported at the fund level. Overall, our results question the veracity of portfolio valuations based on investment-round pricing, especially when the VC is under the pressure to raise a new fund.