Temporal Dynamics of Venture Capital Funds: Investment Timing and Performance

Abstract

This study investigates how venture capital (VC) fund age influences investment outcomes, focusing on younger funds’ ability to attract higher-quality startups and increase the likelihood of successful exits. We present a theoretical model suggesting that funds attract high-quality startups early in the funds' lifecycle by offering extended monitoring and greater opportunities for follow-on investments---channels that are further strengthened by entrepreneurs’ selection of younger funds. Using a comprehensive dataset of VC funds, we find empirical evidence supporting our model, showing that investments made earlier in a fund’s lifecycle achieve significantly higher exit rates and receive more follow-on funding. By controlling for fund and startup characteristics and interacting fund age with industry-level financial intensity and fund specialization, we identify the two channels and quantify the role of entrepreneurs' selection of funds in the startup-VC matching process. This research provides novel insights into the temporal dynamics of VC value creation and how investment timing and entrepreneurial choices influence startup outcomes.

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