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VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options


  • Richard Smith,

    1. Richard Smith is a Professor of Finance and the Philip L. Boyd Chair at the A. Gary Anderson Graduate School of Management at the University of California Riverside in Riverside, CA.
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  • Robert Pedace,

    1. Roberto Pedace is an Associate Professor of Economics at Scripps College in Claremont, CA.
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  • Vijay Sathe

    1. Vijay Sathe is the C.S. and D.J. Davidson Chair and Professor of Management at the Peter F. Drucker and Masatoshi Ito Graduate School of Management at Claremont Graduate University in Claremont, CA.
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  • 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.


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.

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