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Journal of Financial Services Research

Erschienen in:

08.10.2018

The Fast and the Curious: VC Drift

verfasst von: Amit Bubna, Sanjiv R. Das, Paul Hanouna

Erschienen in: Journal of Financial Services Research | Ausgabe 1/2020

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Abstract

We develop a measure of a VC firm’s investment style and its change over time (drift). While drift can be beneficial for responding to new market conditions, it reduces the ability to develop style expertise. We document evidence of drift among VCs and find that it is more prevalent among VCs who are less experienced and face pressure to invest their funds. We also find a negative relation between drift and performance, with stronger effects for VCs who herd and are seasoned. Overall, our results are consistent with the hypothesis that drift is detrimental to VC performance.

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This concept is similar to the economies-of-scope in multi-product firms (Panzar and Willig 1981).

The level of industry categorization is defined fairly broadly so as to allow for new sub-sectors within existing industry classification.

Even within the confines of the limited partnership agreement VCs have flexibility in their investment choices. For instance, Sequoia Capital XI fund invested in both shoe stores and network security firms (Hochberg and Westerfield 2010).

Also called secondary sales, buyout refers to the sale of a VC’s portfolio investment to another fund.

It is possible for a portfolio company to go through multiple exits. For example, initial investors in America Online (AOL) exited through a buyout in mid-1985. Subsequently AOL had an IPO in early 1992 allowing its investors from the buyout round to exit. However, an investor from a given financing round can only experience one exit type.

In those cases where the same VC firm has multiple dates as its founding year, we use the year of the VC’s earliest fund in the sample as the VC firm’s founding year. Also, to minimize errors, we truncate all pre-1961 founding years to 1961.

For a recent review, see Krishnan and Masulis (2012). We follow their paper in calculating the IPO rate since they find that the number of IPOs in a VC’s portfolio over the prior three calendar years relative to the number of companies it actively invested in is a good predictor of portfolio company performance.

It is possible that the 10-year fund life rule is not binding as fund life can be extended by mutual limited partner-general partner agreement. However, reputation concerns would still weigh in on general partners who have uninvested funds.

See King et al. (2011) for a discussion on CEM and a comparative analysis of alternative matching procedures, including the commonly used propensity score matching.

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Titel: The Fast and the Curious: VC Drift
verfasst von: Amit Bubna
Sanjiv R. Das
Paul Hanouna
Publikationsdatum: 08.10.2018
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 1/2020
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-018-0302-0