research

Using hand-collected data on the backgrounds of venture capitalists (VCs), we show that in a typical venture capital firm in our sample, 13.9% of VCs have been entrepreneurs before becoming a VC, referred to as entrepreneur VCs. Both OLS and 2SLS analyses suggest that venture capital firms employing a greater fraction of entrepreneur VCs have better performance. In addition, the positive effect of entrepreneur VCs on venture capital firm performance is stronger for smaller and younger venture capital firms, and venture capital firms specializing in high-tech industries and in early-stage investments. Read more
Analyzing a large sample of gross fund-level and deal-level returns in Private Equity (PE), we study systematic differences in investment skills across PE firms and what investors can learn about the true skill of PE firms from past performance. We extend the framework of Korteweg and Sorensen (2017) and establish a flexible variance decomposition model that estimates heterogeneity in returns, idiosyncratic risk-taking, and default risk. Our results show that investment skills are systematically different across PE firms with an estimated interquartile spread of returns ranging from 23% to 26% for deals and 17% to 21% for funds, relative to the market. Read more
This study investigates the effects of economic cycles on abnormal value creation of buyouts (BO) and on the investment activity of the corresponding Private Equity (PE) funds. We benchmark a large sample of BO transactions with closely matched public companies from 1986 to 2017. Our results show that BO transactions have created significantly more value overall, but abnormal value creation has disappeared in more recent periods. However, BO transactions are considerably less sensitive to adverse shocks in the real economy than their public counterparts. Read more
Over the past three decades, universities in industrialized countries have become increasingly active as venture capital financiers. Here, we analyze if investments in university-affiliated portfolio companies, in the form of an institutional-personal relation between the university and the founders, are a commercially successful investment proposition. We use a hand-collected data set of 706 university portfolio companies in the United States and the United Kingdom to extend previous case-based evidence that investments in faculty- and student-led start-ups are an elusive promise that rarely pays off commercially. Read more
Understanding value creation at the transaction level is at the heart of explaining private equity (PE) returns. Taking advantage of a proprietary sample of 2,029 international buyout deals executed between 1984 and 2013 we provide detailed evidence on financial, market and operational value creation drivers. Additionally, we unravel the differences in value creation between regions, industries, transaction sizes and over time, providing limited and general partners with the opportunity to compare their past transactions with those of their respective peer groups. Read more
This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). After accounting for fees, FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. Read more
An increasingly global venture capital (VC) business raises the question whether foreign VCs’ investments pull economic activity away from domestic economies. Using a large sample of VC-backed European ventures, we analyze whether involvement of foreign VCs influences firms’ and entrepreneurs’ migration patterns. We provide evidence that foreign investors, in particular from the U.S., on average, back much better European ventures and increase the likelihood of foreign exits and emigration of entrepreneurs. Read more
In this paper we explore whether or not the experience as a founder of a venture capital-backed startup influences the performance of founders who become venture capitalists (VCs). We find that nearly 7% of VCs were previously founders of a venture-backed startup. Having a successful exit and being male and white increase the probability that a founder transitions into a venture capital career. Successful founder-VCs have investment success rates that are 6. Read more
There has been an increasing asymmetry between the rising interest in private companies and the limited availability of data. While a group of new commercial data providers has identified this gap as a promising business opportunity, and has started to provide structured information on private companies and their investors, little is known about the quality of the data they provide. In this paper, we compare detailed and verified proprietary information on 339 actual venture capital (VC) financing rounds from 396 investors in 108 different (mostly European) companies, with data included in eight frequently used VC databases to help academic scholars and investors better understand the coverage and quality of these datasets and, thus, interpret the results more accurately. Read more
We use machine learning to study how venture capitalists (VCs) make investment decisions. Using a large administrative data set on French entrepreneurs that contains VC-backed as well as non-VC-backed firms, we use algorithmic predictions of new ventures’ performance to identify the most promising ventures. We find that VCs invest in some firms that perform predictably poorly and pass on others that perform predictably well. Consistent with models of stereotypical thinking, we show that VCs select entrepreneurs whose characteristics are representative of the most successful entrepreneurs ( i. Read more