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Factors Determining the Performance of Early Stage High-Technology Venture Capital Funds – A Review of the Academic Literature

Factors Determining the Performance of Early Stage High-Technology Venture Capital Funds – A Review of the Academic Literature

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Published by dmaproiect
The purpose of this literature review is to document academic research concerning factors
influencing the performances of venture capital funds, as well as the venture capital fundraising
decisions. Industry specialisation, large fund sizes, strong deal flow, syndication of investments,
and especially, experience, all appear to be factors leading to superior investment performance,
which is particularly well illustrated by the US venture capital industry. The review also concludes
that venture capital fund returns to a great extent depend on an early or later stage focus, and the
timing of the fundraisings. For policy makers the most significant measures, according to the
findings, are to nurture a competitive local technology stock market, establish efficient legal
frameworks and tax structures, and minimize labour market rigidities. Moreover, it seems like the
vast majority of all venture capital returns are generated by the limited number of funds in the top
quartile. Therefore, the possibility to get access to the best performing venture capital funds is
probably more important than anything else in order for institutional investors to gain excess
returns. In terms of geographical differences, the UK venture capital situation appears to be
somewhere half way between the US and the continental Europe.
The purpose of this literature review is to document academic research concerning factors
influencing the performances of venture capital funds, as well as the venture capital fundraising
decisions. Industry specialisation, large fund sizes, strong deal flow, syndication of investments,
and especially, experience, all appear to be factors leading to superior investment performance,
which is particularly well illustrated by the US venture capital industry. The review also concludes
that venture capital fund returns to a great extent depend on an early or later stage focus, and the
timing of the fundraisings. For policy makers the most significant measures, according to the
findings, are to nurture a competitive local technology stock market, establish efficient legal
frameworks and tax structures, and minimize labour market rigidities. Moreover, it seems like the
vast majority of all venture capital returns are generated by the limited number of funds in the top
quartile. Therefore, the possibility to get access to the best performing venture capital funds is
probably more important than anything else in order for institutional investors to gain excess
returns. In terms of geographical differences, the UK venture capital situation appears to be
somewhere half way between the US and the continental Europe.

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Published by: dmaproiect on Feb 25, 2010
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05/11/2014

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There seems to be a general belief in the academic literature that going public is the most profitable

and prestigious exit route for venture capitalists (e.g. Black and Gilson, 1998; e.g. Jeng and Wells, 2000;

Barnes and McCarthy, 2002). In the VC industry, bringing a company public is a signal of success for the

VC firm backing the issuing company. Apart from the obvious profitability measure, VCs typically

measure their success in terms of the number of companies they have taken public (Barnes and McCarthy,

2002). Jeng and Well (2000) found that IPOs are the strongest driver of VC investing, although primarily

for later stage VC investments. Black and Gilson (1999) state that US venture capital funds earned on

average 60% annual return on investment in IPO exits, compared to 15% on acquisition exits.

Schwienbacher (2002) shows that replacement of entrepreneurs, reporting requirements and staged

financing seem to significantly effect the portfolio firm’s likelihood of going public, while investments in

seed and start-up stages induce higher liquidation rates.

According to Giot and Schwienbacher (2005), VC backed companies tend initially to exhibit an

increased likelihood of achieving an exit through IPO. However, the possibilities of an IPO exit become

increasingly small as time passes. This pattern is the strongest for biotech and Internet companies which

tend to reach their plateau sooner than e.g. computer or semiconductor companies. For trade sales, the

plateau is reached much later and tends to decrease slowly thereafter.

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