Inside Rounds and Venture Capital Returns. Matthew Rhodes-Kropf, December 27, 2015, Paper. “We study sequential investment decisions in the venture capital (VC) industry. VC-backed companies typically need to raise several rounds of funding from VC funds. The decision whether to provide further funding to the company and the terms of the new funding determine VC fund returns. We show that investment outcomes in the VC industry can be predicted by whether a round of funding is provided by only VCs who previously invested in the firm, or new VCs join the syndicate of investors. With asymmetric information, financial intermediaries are often thought to “hold up” firms and earn rents on their inside knowledge. However, we show that inside rounds, in which only existing investors participate, lead to a higher likelihood of failure, lower probability of IPOs, and lower cash on cash multiples than rounds with new investors. Inside rounds also appear to be negative NPV, suggesting that investors make inefficient continuation decisions …Link