Mutual Funds As Venture Capitalists? Evidence from Unicorns

43 Pages Posted: 11 Jan 2017  

Sergey Chernenko

Ohio State University (OSU) - Department of Finance

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Yao Zeng

University of Washington - Michael G. Foster School of Business

Date Written: January 10, 2017

Abstract

Using novel contract-level data, we study the recent trend in open-end mutual funds investing in unicorns — highly valued, privately held start-ups — and the consequences of mutual fund investment for corporate governance provisions. Larger funds and those with more stable funding are more likely to invest in unicorns. Compared to venture capital groups (VCs), mutual funds appear to have weaker cash flow rights and to be less involved in terms of corporate governance, being particularly underrepresented on boards of directors. Having to carefully manage their own liquidity pushes mutual funds to require stronger redemption rights and eschew “pay-to-play” provisions, suggesting contractual choices consistent with mutual funds’ short-term capital sources.

Keywords: mutual funds, venture capitalists (VC), unicorns, corporate governance, liquidity

Suggested Citation

Chernenko, Sergey and Lerner, Josh and Zeng, Yao, Mutual Funds As Venture Capitalists? Evidence from Unicorns (January 10, 2017). Available at SSRN: https://ssrn.com/abstract=2897254 or http://dx.doi.org/10.2139/ssrn.2897254

Sergey Chernenko

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
(614) 292-4412 (Phone)

HOME PAGE: http://www.fisher.osu.edu/~chernenko_1

Josh Lerner

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yao Zeng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://sites.google.com/site/yaozengwebsite/

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