Early Indicators of Fundraising Success by Venture Capital Firms

Abstract

We show how a venture capital firm’s fundraising is affected by its investment choices. We investigate three leading indicators that are calculated from the type of investments the venture capital firms make: style drift investments, follow-on investments, and investments in which the venture capital firm is not the lead investor in the portfolio company. We find that these investments are associated with lower fundraising. Investment type and fundraising reaction to investment type are both moderately stable through time. We also find evidence that information about investment types is more important for fundraising during bad states of the world.

Keywords: Private equity, signaling, style drift, follow-on investments, lead investor, performance indicator, venture capital, fundraising

JEL Classification: G11, G23, G24