Abstract
We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional initial public offering (IPO) among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time.
1. Introduction
One of the distinctive features of private equity as an asset class has been long-term persistence in the relative performance of private equity partnerships. Kaplan and Schoar (2005), for example, find correlations of nearly 0.5 between the returns of one fund and the next within a given private equity firm.
2. Data
We analyze data drawn from the VentureXpert database maintained by Thomson Reuters, which includes round-level information on venture capital investments around the world.
3. Persistence
We begin by documenting persistence in the performance of venture capital investors at the investment level. Our approach involves assessing the strength of association between the success of a VC firm’s prior investments and its success in subsequent investments.
4. Sources of persistence
Despite the convergence in performance over time, VC firms that enjoyed higher initial success continued to see higher subsequent success until they invested in more than 60 companies.
5. Discussion
To understand better what channels might account for persistence in the performance of venture capital firms, we examine how the performance of VC firms’ investments—in terms of having successful exits, either through IPOs or trade sales—depend on their initial success.