More Than Money: VC due diligence drives innovation and business dynamism
Dr Juanita Gonzalez Uribe, Associate Professor of Finance at LSE and Dr Robyn Klingler-Vidra, Associate Professor in Political Economy & Entrepreneurship and Vice Dean of Global Engagement at LSE argue that the venture capital due diligence process itself has significant upsides for the businesses applying for support. The articles outlines how their research found that startups selected for due diligence do not just grow faster; they also adopt new digital tools and website technologies before raising external funding.
The UK has a powerful opportunity to reignite growth by boosting productivity, investment, and innovation. Venture capital is well known as an effective lever for achieving this. Many of the world’s most valuable companies, and a disproportionate share of those that are now publicly traded, were backed by VCs in their ascent. VCs support ambitious founders by leveraging their professional networks, operational expertise and further fundraising to help scale breakthrough firms. Until now, however, this impact has been viewed too narrowly, as if it applied only to the small number of portfolio companies that ultimately secure funding.
Our new research shows the influence goes much further. VCs shape the wider startup ecosystem in ways that matter profoundly for Britain’s ability to innovate and grow. Startups that are selected for due diligence with a VC—even without securing investment from that investor—grow on average 30% within two years. Meanwhile, weaker firms wind down faster. This combination, propelling promising firms forward while prompting entrepreneurs to reallocate effort away from weaker ventures, means VCs act as catalysts for innovation and dynamism across a much broader set of companies.
This reach is vast. Roughly a quarter of applicants to a VC fund reach some stage of due diligence, which involves meetings with founders, pitch presentations, investment committee debates, and technical and legal checks. Yet only about 1% ultimately secure capital. Until now, what happened to the remaining 99% has been invisible given the industry’s standard datasets like Crunchbase or PitchBook, which only record deals, not fundraising attempts.
To shed light on dynamics occurring within this hidden funnel, we partnered with a UK early-stage VC firm that shared records on the nearly 2,000 applications it received when deploying the fund’s money. Linking these data to Companies House, Crunchbase, LinkedIn, and technology adoption metrics from BuiltWith, we were able to track outcomes for both successful and unsuccessful applicants.
The results are striking. Startups selected for due diligence do not just grow faster; they also adopt new digital tools and website technologies before raising external funding. Their “tech stacks” often mirror those used by other firms selected for due diligence by the fund, suggesting that engaging with the VC spreads knowledge and tech choices across startups. Through the due diligence process, founders learn through feedback, benefit from referrals, and can gain credibility simply by being shortlisted. Even preparing for diligence can sharpen strategy. In short: VC engagement builds capability, not just raising capital.
The implications are clear.
For founders: fundraising creates value even without a cheque. The key is to target investors whose expertise fits your business. Time is scarce, but our study shows that going through due diligence is never wasted, even if it does not end in funding.
For investors: Constructive engagement multiplies value across the ecosystem, strengthening the future deal pipeline. Every pitch heard and every founder coached is an investment in the market itself.
For policymakers: quality matters more than quantity. Initiatives that enable matches between investors and startups that fit their investment mandate are far more effective than generic networking schemes. Innovation thrives when conversations happen between motivated parties.
The UK cannot afford to underestimate this broader role of venture capital. By investing time, expertise, and credibility into startups beyond their portfolios, VCs are powering the dynamism and scale-up potential that Britain’s economy depends on.
As the country searches for new sources of growth, the lesson is clear: venture capital must be at the heart of the UK’s innovation strategy—not only as financiers, but as ecosystem capability builders.
Authored by Dr Juanita Gonzalez Uribe, Associate Professor of Finance at LSE
and Dr Robyn Klingler-Vidra, Associate Professor in Political Economy & Entrepreneurship and Vice Dean of Global Engagement at LSE
