We have benefited from the comments of Bill Christie (Editor) and an anonymous referee, as well as conference participants at the Searle/Kauffman Research Symposium on Economics and Law of the Entrepreneur, the Kauffman/Society of Finance Conference on Entrepreneurship and Innovation, the FMA European Finance Meetings, and the World Finance Conference, and from the comments of seminar participants at the University of California, Riverside, University of Hawaii, and Chapman University.
VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options
Article first published online: 6 DEC 2011
© 2011 Financial Management Association International
Volume 40, Issue 4, pages 1029–1065, Winter 2011
How to Cite
Smith, R., Pedace, R. and Sathe, V. (2011), VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options. Financial Management, 40: 1029–1065. doi: 10.1111/j.1755-053X.2011.01170.x
- Issue published online: 6 DEC 2011
- Article first published online: 6 DEC 2011
By combining data from two sources, we are able to examine how fund financial performance is related to fund outcomes (initial public offering [IPO] and merger & acquisition (M&A) percentages) and abandonment practices. We also are able to relate fund performance to the track record of the venture capital firm. Our primary findings include: 1) fund IPO and M&A outcomes are statistically significantly related to financial performance, 2) M&A success is around 60% to 80% as important as IPO success in explaining performance, 3) except among the top performers, funds with aggressive exercise of abandonment options outperform those that continue to support a large percentage of their initial investments, and 4) prior performance of the firm, in terms of success percentages and abandonment practices, is significantly related to fund performance. Results are robust to controlling for selection bias of the reporting entities, as well as biases related to looking back at the performance of earlier funds survivorship, and attrition. Quantile regression estimates establish that our results hold across the full range of realized performance levels.