Disaggregating Exit Success Rates into Ability and Risk Components

54 Pages Posted: 30 Sep 2014

Date Written: September 30, 2014

Abstract

I develop a model that enables the disaggregation of exit rates into ability and risk components. Consequent on this disaggregation, I find decreasing returns to scale within the cross-section of the VC market is induced by strictly concave relations that obtain between the risk component of exit rates and fund size. These strictly concave relations result in a situation where strategies that simply leverage fund risk do not result in superior investment performance. In empirical tests of the relation between ability and fund size, my findings show the ability component of exit rates increases monotonically with fund size, such that fund size is a unique and time invariant proxy for managerial ability, as well as an extremely precise out-of-sample predictor of future investment performance. My findings have implications for models of interactions between VCs and their principals, as well as empirical studies of investment performance within the VC market.

Keywords: Venture Capital, Ability, Risk, Skewness, Diversification, Exit Rates, Fund Size

JEL Classification: G24, G11

Suggested Citation

Obrimah, Oghenovo A., Disaggregating Exit Success Rates into Ability and Risk Components (September 30, 2014). Available at SSRN: https://ssrn.com/abstract=2503294 or http://dx.doi.org/10.2139/ssrn.2503294

Oghenovo A. Obrimah (Contact Author)

FISK University ( email )

1000 17th Ave N
Nashville, TN TN 37208-3051
United States
4049404990 (Phone)

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