Persistence in VC Performance

The relative performance of private equity investors seems to be persistent. A PE firm’s performance with one fund is a good indicator for the performance of its next fund. However, while most scientists have focussed on fund level analyses, research from the Harvard Business School finds that in venture capital portfolios, performance is persistent at the investment level too. 

According to the study pursued by Ramana Nanda, Sampsa Samila and Olav Sorenson, a 20 point higher IPO rate among the first five investments, i.e. one additional IPO, results in a more than two percentage point higher IPO rate of the VC firm across all subsequent investments. Because less than one-sixth of all investments result in an IPO, the likelihood of public offerings increases by 12.7 percent. Correcting the success rate for regions, industries and investment stages, the subsequent IPO rate is still 7 percent higher. “On average, success in the first five or ten investments predicted better performance for at least the next 50 investments made by a VC firm,” shows the study titled The Persistent Effect of Initial Success: Evidence from Venture Capital. 

However, the study clarifies that this persistent success is not due to the VCs ability to nurture start-ups or spot the rights trends. Instead, the access to entrepreneurs seems to be a driver of subsequent achievements. After initial success, further entrepreneurs want to be supported by a successful VC, providing the venture capitals with improved access to further deals, especially in later stages, where success can easier be identified.