Do Entrepreneurs Make Good VCs?

Ye Cai

Santa Clara University - Leavey School of Business

Merih Sevilir

Indiana University - Kelley School of Business

Xuan Tian

Indiana University - Kelley School of Business

October 3, 2012

AFA 2013 San Diego Meetings Paper

Using hand-collected data on the backgrounds of venture capitalists (VCs), we show that in a typical venture capital firm in our sample, 13.9% of VCs have been entrepreneurs before becoming a VC, referred to as entrepreneur VCs. Both OLS and 2SLS analyses suggest that venture capital firms employing a greater fraction of entrepreneur VCs have better performance. In addition, the positive effect of entrepreneur VCs on venture capital firm performance is stronger for smaller and younger venture capital firms, and venture capital firms specializing in high-tech industries and in early-stage investments. We further explore performance implications of VCs with prior experience in a finance-related field (i.e., Wall Street experience) and prior experience in a non-finance related field (i.e., Main Street experience). We find that contrary to prior experience in entrepreneurship, neither prior experience in Wall Street nor in Main Street is significantly related to venture capital firm performance. Finally, we provide evidence that entrepreneur VCs have greater individual performance in terms of VC rankings established by Forbes. Overall, our results are consistent with the idea that entrepreneur VCs have a better understanding of the business of starting and developing a new firm due to their first-hands experience, and play an important role in reducing the gaps in information and difference of opinions between an entrepreneur and the VCs backing the entrepreneur.

Number of Pages in PDF File: 41

Keywords: Venture Capitalist, Entrepreneur

JEL Classification: G24

working papers series

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Date posted: March 14, 2012 ; Last revised: October 29, 2012

Suggested Citation

Cai, Ye and Sevilir, Merih and Tian, Xuan, Do Entrepreneurs Make Good VCs? (October 3, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2021327 or http://dx.doi.org/10.2139/ssrn.2021327

Contact Information

Ye Cai
Santa Clara University - Leavey School of Business ( email )
500 El Camino Real
Santa Clara, CA California 95053
United States
Merih Sevilir (Contact Author)
Indiana University - Kelley School of Business ( email )
1309 East Tenth Street
Indianapolis, IN 47405-1701
United States
Xuan Tian
Indiana University - Kelley School of Business ( email )
1309 E. Tenth Street
Bloomington, IN 47405
United States
812-8553420 (Phone)
824-8555875 (Fax)
HOME PAGE: http://kelley.iu.edu/tianx
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