Informational Hold-Up and Performance Persistence in Venture Capital

83 Pages Posted: 1 Sep 2008 Last revised: 29 Oct 2014

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Alexander Ljungqvist

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)

Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2012

Abstract

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.

Keywords: Venture Capital, Performance Persistence, Learning, Hold-up

Suggested Citation

Hochberg, Yael V. and Ljungqvist, Alexander and Vissing-Jorgensen, Annette, Informational Hold-Up and Performance Persistence in Venture Capital (October 16, 2012). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1260496 or http://dx.doi.org/10.2139/ssrn.1260496

Yael V. Hochberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Rice University - Jesse H. Jones Graduate School of Business ( email )

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Alexander Ljungqvist

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

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Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Annette Vissing-Jorgensen

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California Berkeley, Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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