The Lifecycle of Venture Capital Funds

Abstract

We analyze the lifecycle dynamics of venture capital (VC) funds and find that the outcomes of portfolio companies vary over a fund’s lifespan. Investments made earlier in a fund’s life are more likely to achieve successful exits through IPOs and M&As. We attribute this pattern to three key channels: the financing channel, which reflects the deeper in-the-money option for follow-on investments available in younger funds; the monitoring channel, which captures the extended non-financial support these funds provide; and the selection channel, which suggests that higher-quality entrepreneurs prefer younger funds due to the added value of financing and monitoring. We first provide empirical evidence supporting these channels by examining patterns in follow-on investments, industry financial intensity, board representation, sector specialization, serial entrepreneurship, and general market conditions. We then develop a theoretical model to formalize these mechanisms and finally validate founder preferences through a survey of investors and entrepreneurs.

Keywords: Venture Capital, Entrepreneurship, Fund Lifecycle, Financing Channel, Monitoring Channels, Sorting, Equilibrium Matching, Stable Matching.