83 Pages Posted: 1 Sep 2008 Last revised: 29 Oct 2014
Date Written: October 16, 2012
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: 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