Informational Hold-Up and Performance Persistence in Venture Capital
Yael V. Hochberg
National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)
National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business
October 16, 2012
EFA 2009 Bergen Meetings Paper
Why don't successful venture capitalists eliminate excess demand for their follow-on funds by aggressively raising their performance fees? We propose a theory of learning that leads to informational hold-up in the VC market. Investors in a fund learn whether the VC has skill or was lucky, whereas potential outside investors only observe returns. This gives the VC's current investors hold-up power when the VC raises his next fund: Without their backing, he cannot persuade anyone else to fund him, since outside investors would interpret the lack of backing as a sign that his skill is low. This hold-up power diminishes the VC's ability to increase fees in line with performance. The model provides a rationale for the persistence in after-fee returns documented by Kaplan and Schoar (2005). Empirical evidence from a large sample of U.S. VC funds is consistent with the model. We estimate that up to 68.7% of VC firms lack skill.
Number of Pages in PDF File: 83
Keywords: Venture Capital, Performance Persistence, Learning, Hold-up
Date posted: September 1, 2008 ; Last revised: October 29, 2014
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