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A Survey of Venture Capital Research

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A Survey of Venture Capital Research NBER WORKING PAPER SERIES A SURVEY OF VENTURE CAPITAL RESEARCH Marco Da Rin Thomas F. Hellmann Manju Puri Working Paper 17523 http://www.nber.org/papers/w17523 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011 We would like to thank Klazina van den Berg and Yaping Mao for their valuable research assistance. All errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Forthcoming in George Constantinides, Milton Harris, and René Stulz (eds.) Handbook of the Economics of Finance, vol 2, Amsterdam, North Holland, 2012. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2011 by Marco Da Rin, Thomas F. Hellmann, and Manju Puri. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. A survey of venture capital research Marco Da Rin, Thomas F. Hellmann, and Manju Puri NBER Working Paper No. 17523 October 2011 JEL No. G21,G23,G24 ABSTRACT This survey reviews the growing body of academic work on venture capital. It lays out the major data sources used. It examines the work on venture capital investments in companies, looking at issues of selection, contracting, post-investment services and exits. The survey considers recent work on organizational structures of venture capital firms, and the relationship between general and limited partners. It discusses the work on the returns to venture capital investments. It also examines public policies, and the role of venture capital in the economy at large. Marco Da Rin Manju Puri Department of Finance-Office K 936 Fuqua School of Business Tilburg University Duke University Warandelaan 2 1 Towerview Drive, Box 90120 P.O. Box 90153 Durham, NC 27708-0120 5000 LE Tilburg and NBER The Netherlands [email protected] and European Corporate Governance Network (ECGI) and IGIER [email protected] Thomas F. Hellmann Sauder School of Business University of British Columbia 2053 Main Mall Vancouver, BC V6T 1Z2 CANADA and NBER [email protected] Table of Contents Section 1: Introduction .................................................................................................................................3 Section 2: Data sources and methodology for empirical research...............................................................6 2.1 Main commercial databases ...............................................................................................................7 2.2 Hand‐collected survey data ................................................................................................................8 2.3 Proprietary industry data....................................................................................................................9 2.4 Census databases..............................................................................................................................10 2.5 Other databases................................................................................................................................11 2.6 Choice of sample...............................................................................................................................12 2.7 Empirical estimation challenges .......................................................................................................15 Section 3: Venture capital investments in entrepreneurial companies .....................................................16 3.1 Investment choices ...........................................................................................................................17 3.1.1 Sources of deal flow...................................................................................................................17 3.1.2 The choice between venture capital and alternative funding sources......................................20 3.1.3 The choice among venture capital firms....................................................................................24 3.2. Contracting.......................................................................................................................................26 3.2.1 Theories of optimal cash flow and control rights ......................................................................26 3.2.2. Empirical evidence on venture capital contracts......................................................................31 3.3. Post‐investment...............................................................................................................................35 3.3.1 Value‐adding services ................................................................................................................35 3.3.2 The staging of venture capital investments...............................................................................38 3.4 Exits ...................................................................................................................................................41 3.4.1 The determinants of exit performance......................................................................................41 3.4.2 The IPO process and post‐IPO performance..............................................................................44 Section 4: The analysis of venture capital firms .........................................................................................49 4.1. The organizational structure of venture capital firms .....................................................................49 4.1.1 Corporate venture capital..........................................................................................................50 4.1.2 Bank‐owned venture capital firms.............................................................................................55 4.1.3 Government‐sponsored venture capital firms ..........................................................................56 4.1.4 The internal organization of venture capital firms ....................................................................59 4.2 Venture capital firms’ investment strategies....................................................................................61 1 4.2.1 Portfolio size and scope .............................................................................................................61 4.2.2 Cross‐border investments..........................................................................................................63 4.3. Relationships among venture capital firms .....................................................................................64 4.3.1 Syndication of venture capital deals..........................................................................................65 4.3.2 Social networks among venture capital firms............................................................................67 4.3.3 Venture capital firm reputation.................................................................................................68 4.4. The relationship between General and Limited Partners................................................................70 Section 5: Returns to venture capital investments.....................................................................................72 5.1. Data and methodological challenges...............................................................................................73 5.1.1 Gross versus net returns............................................................................................................73 5.1.2 Data availability and reporting biases........................................................................................74 5.1.3 What measure of returns?.........................................................................................................77 5.2. Return estimates..............................................................................................................................78 5.2.1 Net returns.................................................................................................................................79 5.2.2 Risk and illiquidity ......................................................................................................................81 5.2.3 Persistence of returns and size effects ......................................................................................83 5.2.4 Differences in Limited Partners returns.....................................................................................85 5.2.5 Gross returns..............................................................................................................................88 5.2.6 Comparison to other private equity investment returns ..........................................................90 Section 6: Venture capital and the economy..............................................................................................90 6.1 The contribution of venture‐backed companies to innovation........................................................91 6.2 The role of venture capital for entry, employment and growth.......................................................94 6.3 Public policy for venture capital .......................................................................................................95
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