The persistent effect of initial success: evidence from venture capital

An 8% increase on the initial public offering (IPO) rate is predicted on subsequent investments for each additional IPO among the first ten investments made by a venture capital (VC), however this performance persistence diminishes with time, according to new insights from Ramana Nanda (Harvard Business School), Sampsa Samila (IESE Business School, University of Navarra), and Olav Sorenson (Yale School of Management). In order to develop these insights into the sources of performance persistence, the authors examined investment-level data and round-level information on global venture capital investments to identify the results of individual portfolio companies and establish the investment history for VC firms.

The findings also describe the factors used by VCs for successful investments, where investing in the right places at the right times was a key determinant. However, VC firms were unable to consistently choose the right places and right times to invest. The impact of early success also led to later rounds and larger syndicates. These results substantiate theory that initial success increases access to deal flow and that preferential access improves the success of subsequent investments thus perpetuating the differences in performance of initial investments.

Learn more in “The persistent effect of initial success: Evidence from venture capital” by R. Nanda, S. Samila and O. Sorenson (2020), Journal of Financial Economics (2020) at ScienceDirect.

CFRA
About CFRA 28 Articles
CFRA aims to provide an effective contribution to scientific research and practice-oriented, pragmatic transfer of knowledge on financial reporting and auditing, as well as financial management more generally. In our Right on the money series, we share easy-to-understand summaries of emerging research in the field. For more information visit CFRA's Website and LinkedIn.

Be the first to comment

Leave a Reply

Your email address will not be published.


*