Venture capital Performance Monitoring Selection Status
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Nanda, R. (Ramana); Samila, S. (Sampsa); Sorenson, O. (Olav). "The persistent effect of initial success: Evidence from venture capital". Journal of financial economics. 137 (1), 2020, 231 - 248
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.