Informational Hold-Up and Performance Persistence in Venture Capital

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

See all articles by Yael V. Hochberg

Yael V. Hochberg

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

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Annette Vissing-Jorgensen

Federal Reserve Board; National Bureau of Economic Research (NBER)

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 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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

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Sweden

European Corporate Governance Institute (ECGI)

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Belgium

Annette Vissing-Jorgensen

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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