The Persistent Effect of Initial Success: Evidence from Venture Capital

49 Pages Posted: 18 Jan 2017 Last revised: 6 Jun 2019

See all articles by Ramana Nanda

Ramana Nanda

Imperial College Business School; Harvard University - Entrepreneurial Management Unit

Sampsa Samila

University of Navarra, IESE Business School

Olav Sorenson

Yale School of Management; University of California, Los Angeles (UCLA) - Policy Area

Multiple version iconThere are 2 versions of this paper

Date Written: June 3, 2019

Abstract

We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional 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.

Keywords: venture capital, performance, monitoring, selection, status

JEL Classification: G24, M13

Suggested Citation

Nanda, Ramana and Samila, Sampsa and Sorenson, Olav, The Persistent Effect of Initial Success: Evidence from Venture Capital (June 3, 2019). Journal of Financial Economics (JFE), Forthcoming, Harvard Business School Entrepreneurial Management Working Paper No. 17-065, Available at SSRN: https://ssrn.com/abstract=2900862 or http://dx.doi.org/10.2139/ssrn.2900862

Ramana Nanda (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

Sampsa Samila

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Olav Sorenson

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

University of California, Los Angeles (UCLA) - Policy Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States
(310) 825-7348 (Phone)
(310) 206-3337 (Fax)

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