Most venture capital (VC) firms will define one of the core competences as the ability to identify and develop high-potential start-ups, so as to capture value from an exit. However, there is a significant difference in fund performance between the top quartile and other VC funds. Such differences are even more interesting when con- sidering that about 85% of financial returns are the result of only 10% of investments.
What determines the ability of VC firms to generate value from venture investing consist- ently? Empirical research in finance and entrepreneurship seems to point to superior dealflow, industry knowledge or networks of high-performing VC firms.
However, a recent research study published by Carn- egie Mellon and Harvard academics examines the extent to which the variation in performance depends on a VC firm’s organisational capital or the skills of investment pro- fessionals that work for the firm.
To this end, Michael Ewens and Matthew Rhodes-Kropf examined consistency at the individual partner investment level using a “unique dataset that tracks the performance of individual venture capitalists’ investments across time and as they move between VC firms”. They covered venture investments from 1987 to 2012 – 27,079 financing rounds in 16,897 start-ups financed by 3,777 investing firms. The rest of this article can be read in our August issue.