What is it about?
We find evidence for reversals in the exit performance of venture capitalists. Leveraging on theories of performance reversals that are rooted in investor rationality but behavioral in nature, we find reversals in performance can be explained by a focus on the ability of a venture capitalist as opposed to a focus on the performance quality of the projects backed by the venture capitalist.
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Why is it important?
As a venture capitalist draws down on the best projects within his opportunity set, in the absence of the arrival of new projects of the highest quality, the average quality of projects decreases over time. If the venture capitalist does not diversify his portfolio by reaching outside of his initial opportunity set, portfolio performance can remain positive, yet deteriorate over time, resulting in performance reversals.
Perspectives
If the goal of a venture capitalist is performance that is comparable to peers, our findings provide a rationale for venture capitalists to diversify their portfolios as they get older. If venture capitalists provide a useful service by ensuring all good projects with positive returns within their opportunity sets get funded, these venture capitalists can thrive and continue to be extremely successful so long as providers of capital derive a non-pecuniary utility from this social service that yields positive returns.
Dr Oghenovo A Obrimah
Fisk University
Read the Original
This page is a summary of: Performance reversals and attitudes towards risk in the venture capital (VC) market, Journal of Economics and Business, November 2010, Elsevier,
DOI: 10.1016/j.jeconbus.2010.06.002.
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