The persistent effect of initial success: Evidence from venture capital

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 thi...

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Bibliographic Details
Published in:Journal of financial economics 2020-07, Vol.137 (1), p.231-248
Main Authors: Nanda, Ramana, Samila, Sampsa, Sorenson, Olav
Format: Article
Language:English
Subjects:
Access
Initial public offerings
Investments
Monitoring
Selection
Status
Studies
Success
Syndicates
Venture capital
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Summary: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. 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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2020.01.004