The Impact of Venture Capital Screening

I study the effect of limited attention on resource allocation by venture capitalists. Using engagement in the IPO process as a measure of distraction, I document that investments made by inattentive venture capitalists into new portfolio companies tend to underperform. Such companies are 7% less likely to go public or get acquired, and also exhibit lower exit multiples. The adverse effect of distraction is present only in the vicinity of the distracting IPO and manifests itself both for individual partners and venture capital funds. Overall, the results indicate that the scarcity of attention hypothesis holds in the context of deal sourcing and screening in venture capital, highlighting the presence of skill in the company selection process.