How Does Human Capital Matter? Evidence from Venture Capital

Abstract

We investigate the effects of human capital mobility on venture capital (VC) investment and outcomes. To establish causality, we use a difference-indifferences approach that relies on plausibly exogenous variations generated by states' staggered recognition of the inevitable disclosure doctrine (IDD). We find that a reduction in human capital mobility reduces VCs' investment propensity and successful exit. Further analysis shows that the effects are more pronounced in industries with more high-skilled workers, in industries with higher patenting intensity, and in earlier-stage VC investment. To mitigate the adverse effect of the IDD, VCs stage finance startups more and are more likely to syndicate with other VCs. Finally, we show that the IDD reduces the mobility of inventors, which contributes to a reduction in startups' patenting and successful exit. Our paper sheds new light on the effects of an important but underexplored determinant of VC investment-the human capital of startups.

Selection determinants and value creation in private equity investment: a systematic literature review

“…Stanfield (2020) also finds evidence that skill affects performance, low-skill firms overcome firm-specific deficiencies through syndication and improve performance, while no such effect was observed for high-skill firms. On the other Gu et al (2022) examines the effects of labor market frictions on VC investment and find a larger effect when human capital is more important to firms, VC investment is uncertain and VCs’ monitoring cost is higher. This emerging interest calls for new research exploring the association between skill, luck, human capital and private equity.…”

Does skilled labor risk matter to suppliers? Evidence from trade credit

“…Human capital or skilled labor is highlighted as an increasingly important factor for firm productivity (Psacharopoulos, 1985) and emerges as one of the most valuable firms’ assets (Zingales, 2000). Human capital is crucial for a firm because some employees possess vital knowledge of the firm's operations and, in particular, those that are critical for the achievement of production and innovation (Gu et al., 2020). Labor is a heterogeneous input for firms’ production technology.…”

“…King et al (2016) show that education enables CEOs to better manage larger and complex banking firms. Recent advances in finance research highlight the importance of skilled labor, referring to the skills, knowledge, and abilities of employees that affect corporate decisions and activities such as post-merger performance (Wan et al, 2021), venture capital investments (Gu et al, 2020), corporate debt maturity (Liu et al, 2021), firm performance (Samagaio & Rodrigues, 2016), and abnormal stock returns (Eiling, 2013).…”

“…It is crucial because these employees possess critical knowledge of the firm's operations and are particularly important for the achievement of the firm's production and innovation. Recent studies highlight the importance of skilled labor in influencing post‐merger performance (Wan et al., 2021), venture capital investments (Gu et al., 2020), corporate debt maturity (Liu et al., 2021), firm performance (Samagaio & Rodrigues, 2016), liquidity risk (Liu et al., 2022), and abnormal stock returns (Eiling, 2013). The loss of certain employees or the inability to attract and retain qualified individuals is likely to have a material adverse effect on firms’ business, financial condition, and operations, particularly if key individuals are subsequently recruited by a competitor.…”

Technological Fit and the Market for Managerial Talent

“…In economic terms, convergence in technology because of a peer firm converging on the focal firm's technology space is associated with a 154% and 65% increase in the odds of becoming a benchmark peer in columns 1 and 2, respectively, supporting our main findings that technology convergence affects the focal firm's benchmarking choice and that the effect is likely to be unrelated to other factors affecting the focal firm. 24 24 To further mitigate the endogeneity concern, we also examine the effect of the staggered rejection of the Inevitable Disclosure Doctrine (IDD) to exploit exogenous variations in employee mobility (and hence knowledge spillovers between firms) by potentially preventing the given firm's employees from being hired by rivals (e.g., Klasa, Ortiz-Molina, Sefling, and Srini (2018), Flammer and Kacperczyk (2019), Na (2020), andGu, Huang, Mao, andTian (2022)). In our context, the rejection of the IDD is likely to increase inventor mobility and hence reduce the protection of a firm's proprietary knowledge, which in turn would typically increase knowledge spillovers between firms.…”