How do VCs (actually) make decisions? Internal evidence from a private startup accelerator

Using a proprietary dataset detailing all startup applications, all internal judging scores and judges’ written comments, all signed financing contracts, and even all audio recordings of interviews and contract negotiations involving one of the largest venture capital-backed startup accelerators in the United States, we open the ‘black box’ of venture capital (VC) decision-making. We first study the entire internal VC investment selection process by examining the key determinants of judging scores from initial screening through to final portfolio firm decisions. For example, by focusing on how individual VC partners/employees evaluate the same potential portfolio firm, we provide novel evidence on the existence of significant VC judge-founder ‘homophily’ biases and detail how different judging settings (e.g., solo vs. group evaluations; availability of quantitative vs. qualitative information) can amplify or mitigate such biases. Second, we document the value implications of adopting different judging policies and scoring aggregation rules (e.g., consensus vs. champion-based decision rules) for VC fund performance. Finally, we are the first to empirically document the key features of a recent innovation in startup firm financial contracting instruments (namely Simple Agreement for Future Equity (SAFE) and Keep It Simple Security (KISS) contracts) and investigate their relationship with startup firm characteristics and internal VC evaluations. We offer novel insights into the role of a salient ‘anchor’ or ‘reference point’ in setting future equity pricing terms as well as the importance of startup financial constraints in VC term sheet negotiations.