Venture Capital Fund Performance: The Effects of Exits, Abandonment, Persistence, Experience, and Reputation

Abstract

We provide new evidence on the importance of venture capital firm skill as a factor in fund performance. By combining data from two sources, we are able to examine how fund performance, measured as fund IRR or total value to paid-in capital, is related to fund outcomes (IPO and acquisition percentages) and abandonment option exercise practices after the fund’s initial investment in a venture. We also are able to relate fund performance to the track record of the venture capital firm, its sector-specific experience, agility, reputation, and investment and exit style. Our primary findings include: (1) fund IPO and M&A outcomes are statistically significantly related to investment performance but with fairly low correlations; (2) M&A success is around 60% to 80% as important as IPO success in explaining fund performance; (3) except for the very top performers, funds with aggressive exercise of abandonment options after the first investment tend to outperform those that continue to support a large percentage of their initial investments; (4) prior performance of the firm, in terms of success percentages and abandonment practices, is strongly related to fund performance; (5) firm experience in the same industry sector is positively related to fund performance, but agility, as reflected by the firm’s ability to move to a new sector, is also valuable; (6) separate from experience, generic firm reputation also is positively related to performance; (7) and investment style, in terms of the mix of exit percentages and abandonment practices, persists over funds of the same firm. These results are robust to controlling for selection bias of the reporting entities, as well as biases related to looking-back at initial fund performance, survivorship, and attrition. Quantile regression estimates establish that our results hold across the full range of realized performance levels, though we do find evidence that top performing funds offered by highly reputable venture capital firms behave differently.

Keywords: venture capital, persistence, reputation, IPO, acquisition, real options

JEL Classification: G14, G24, G32, G34