Retail capital as a stepping stone in venture capital: theory and empirics

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Speaker: Dr Ran Xing, Baruch College, Zicklin School of Business, City University of New York

About the seminar topic

What are the equilibrium allocation and welfare effects of retail investor entry into private markets? The conventional debate focuses on direct effects: potential benefits (portfolio diversification and access to high-return assets) versus costs (excessive fees and inefficient capital allocation by retail investors). We identify an indirect effect: retail investors fund experimentation with unproven general partners (GPs), producing track records that institutions later use to select managers. In our sample of venture capital funds, GPs who started with retail capital account for 34.8% of the value added by institutional funds of GPs with a track record.

We formalise this stepping-stone mechanism by extending Berk and Green (2004), ‘Mutual Fund Flows and Performance in Rational Markets’, to venture capital with heterogeneous investors and uncertain manager skill. New GPs with moderate perceived ability raise retail capital to reveal their true skill. Skilled GPs then graduate to institutional capital and unsuccessful GPs exit. Our calibrated model shows that retail investor entry raises aggregate welfare when stepping-stone benefits exceed inefficient allocation costs.

Speaker bio

Dr Ran Xing is an Assistant Professor of Finance at Baruch College, City University of New York. His research combines theoretical and empirical approaches to study the asset management industry, with a focus on mutual funds, venture capital and delegated investment management.

He has 3 papers published or accepted for publication in the Journal of Finance. His research has received several awards, including the Conference Best Paper Awards at the Financial Management & Accounting Research Conference (FMARC) in 2024, the Yihong Xia Best Paper Award at the China International Conference in Finance (CICF) in 2026 and the Hans Dalborg Award in 2023. His research has been presented at leading academic conferences, including the American Finance Association (AFA), Western Finance Association (WFA), European Finance Association (EFA), Society for Financial Studies (SFS) Cavalcade and National Bureau of Economic Research (NBER) Corporate Finance Program Meeting.

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