Low Risk and High Return? Political Connections in Venture Capital Investments

Abstract

Venture capital (VC) firms are characterized by investing in high-risk/high-return deals. Drawing upon the influence rent perspective, our study finds that the risk-return relation of VC investments can be manipulated and distorted through political influence. Based on 8,748 VC deals made by 359 VC firms in China, it shows that politically-connected VC (PVC) firms tend to invest in late stage companies (low-risk). Moreover, PVC firms exit VC deals significantly more quickly and demonstrate higher investment returns than other VC firms (high-return). Finally, we show that PVC-bundled firms (i.e., VC firms closely following PVCs via co-invest relationships) are endorsed with setting-specific influence rents and can also access to low-risk/high-return VC deals when co-invest with PVC firms.