Partisan Bias in Venture Capital Financing
Abstract
Thisstudyinvestigatestheeffectsofpoliticalhomophilybetweenventurecapital(VC) partnersandcompanyCEOsoninvestmentdecisionsandoutcomes. Usingacompre- hensivedatasetofU.S.VCinvestmentsmatchedwithpoliticaldonationrecordsfrom 2000to2021,wefindthatpoliticalsimilarityincreasesthelikelihoodofinvestmentbut negativelyimpactsexitperformance,loweringIPOandM&Asuccessratesanddelay- ing exits. These findings support the in-group favoritism explanation. Shared parti- sanship promotes trust and collaboration but can lead to overconfidence and group- think that deteriorates exit performance. Alignment with the broader political envi- ronment(e.g., theincumbentgovernmentorlocalpoliticalpreferences)canmitigate theseeffectsbyenhancinglegitimacyandaccesstoresources. Ouranalysisofinvest- ment structure shows that politically aligned CEO-VC pairs favor early-stage, first- round, non-syndicated deals, yet experience slower follow-on financing and longer intervals between rounds. These findings offer novel insights into how ideological alignmentinfluencesventureinvestmentbehaviorandperformancewithimplications forentrepreneurs,investors,andpolicymakers. D72,G24,L14,L26,M13