Fund Size, Limited Attention, and Valuation of Venture Capital Backed Firms

37 Pages Posted: 1 Oct 2010 Last revised: 6 Oct 2010

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Na Dai

SUNY at Albany - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2010

Abstract

This paper examines the effect of fund size on investee firm valuations in the venture capital market. We show a convex (U-shape) relationship between fund size and firm valuations. We further document firm valuations are positively correlated to measures of limited attention. In addition, we show a concave (inverse U-shape) relationship between fund size and venture’s performance measured as the probability of successful exits. Further, this relation is particularly strong when the pre-money valuation of the investment is high. Our findings hold across a wide range of robustness checks, including but not limited to sample selection and correction for unobserved company-level value drivers. Our findings support the notion that there is diseconomy of scale in the venture capital industry, which is partially due to the constraints from the quality and quantity of human capital when fund size grows.

Keywords: Venture Capital, Fund Size, Limited Attention, Private Equity Valuation

JEL Classification: G24, G32

Suggested Citation

Cumming, Douglas J. and Dai, Na, Fund Size, Limited Attention, and Valuation of Venture Capital Backed Firms (September 30, 2010). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1685335

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Na Dai (Contact Author)

SUNY at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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