When Unicorns Die: The Effects of High-Profile StartupFailures on Venture Capital Investing

Reputation plays a critical role in the venture capital (VC) industry, shaping a firm’s ability to raise funds, win deals, and support portfolio companies. While existing research has explored how firm-level misconduct can damage a VC firm’s reputation, less is known about how reputational harm can arise through the high-profile collapse of a portfolio company. In this thesis, I investigate the reputational spillover effects of two prominent startup failures: Theranos and Solyndra. Using data from PitchBook, I identify VC firms that backed these companies and compare the average size of funding rounds they participated in to that of matched control firms over an eleven-year window surrounding each collapse. While pre-trends in deal involvement are statistically insignificant, I find that firms associated with Theranos or Solyndra experience an immediate and persistent relative decline in investment activity following the public collapse of the company they funded. The effect is most pronounced when both events are analyzed jointly. I also find preliminary evidence that larger and more established VC firms may experience more severe reputational consequences than their younger, smaller counterparts. These findings contribute to a broader understanding of how reputational damage can influence investment behavior in venture capital and lay the groundwork for future research on reputational spillovers.