Do Entrepreneurs Make Good VCs?

41 Pages Posted: 14 Mar 2012 Last revised: 22 Oct 2014

Ye Cai

Santa Clara University - Leavey School of Business

Merih Sevilir

Indiana University - Kelley School of Business - Department of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: October 3, 2012

Abstract

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.

Keywords: Venture Capitalist, Entrepreneur

JEL Classification: G24

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: https://ssrn.com/abstract=2021327 or http://dx.doi.org/10.2139/ssrn.2021327

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 - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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