Investor Horizon and the Life Cycle of Innovative Firms: Evidence from Venture Capital

49 Pages Posted: 19 Mar 2012 Last revised: 13 Jul 2016

Date Written: February 2016

Abstract

This paper studies whether and how the contractual horizon of venture capital funds affects their investments in innovative firms. I find that funds with a longer remaining horizon select younger companies at an earlier stage of their development, which grow their patent stock significantly more than companies financed by funds with a shorter horizon. The sensitivity of investment decisions to horizon is stronger among experienced venture capital firms, who allocate investments across a larger number of fund vintages. Finally, I find that the interaction of funds' fixed horizon with their option-like compensation structure affects their investment decisions: when early performance has been high, fund managers target less innovative companies. These findings shed light on the cash management practices of venture capital funds, and on their implications for the type of companies that receive venture capital financing.

Keywords: private equity, venture capital, compensation, investor horizon

JEL Classification: G24

Suggested Citation

Barrot, Jean-Noel, Investor Horizon and the Life Cycle of Innovative Firms: Evidence from Venture Capital (February 2016). Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper, AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2024601 or http://dx.doi.org/10.2139/ssrn.2024601

Jean-Noel Barrot (Contact Author)

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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