Working Paper: NBER ID: w24887
Authors: Ramana Nanda; Sampsa Samila; Olav Sorenson
Abstract: We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional 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. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.
Keywords: venture capital; performance persistence; initial success; investment outcomes; deal flow
JEL Codes: G24; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Access to deal flow (G24) | Performance persistence (C41) |
| Each additional IPO among a VC firm's first ten investments (G24) | Higher IPO rate for subsequent investments (G24) |
| Initial success (Y20) | Diminishing effect over time (D15) |
| Initial success (Y20) | Subsequent performance differences among VC firms (L25) |
| Initial success (Y20) | Higher probabilities of future IPOs (G24) |