Fund flows and performance in the venture capital industry.

• Author: Schoar, Antoinette
• Position: Research Summaries

The venture capital industry in the United States has undergone a major expansion over the last three decades, starting from a handful of funds in the early 1980s to an industry with more than $50 billion in invested capital per year today. However, this expansion has not been entirely smooth: the venture capital industry experienced a dramatic boom and growth period in the late 1990s, but a subsequent bust led to consolidation of the industry after 2001. In the aftermath of the tech bubble's bursting, the average performance of the venture capital industry in the United States over the last decade has been poor.

When compared to the R and D budgets of the largest public firms in the United States, the size of the venture capital industry is small in absolute terms. But there is intense interest in the performance and functioning of this industry because of its central role as a catalyst in providing risk capital to entrepreneurs. In this context, the poor performance of venture capital over the last decade is of great concern for policymakers and market participants alike.

My research aims to understand the factors that drive the efficiency of fund flows and performance in the industry and ultimately the role of venture investments on entrepreneurial firms. In a series of research papers, my co-authors and I have studied the role of investor and fund manager heterogeneity in an attempt to understand industry performance and investment behavior.

Persistence and heterogeneity in fund returns

Steven Kaplan and I provide the first large-scale documentation of private equity returns at the fund level, using a novel dataset of individual fund performance collected by Venture Economics. (1) We document three stylized facts about the industry that have not been closely examined before. First, when we investigate the performance of private equity funds, we find that venture capital (VC) fund returns on average are lower than the S&P 500 on an equal-weighted basis, but that they are higher than the S&P 500 on a capital-weighted basis. We also find a great deal of heterogeneity in returns across funds and time.

Second, we find substantial persistence in VC fund performance. General partners (GPs)--that is, the managers of VC funds--whose funds outperform the industry in one fund are likely to outperform the industry in the next fund, and vice versa. Furthermore, we find persistence not only between two consecutive funds but also between the current fund and the fund that preceded it. These findings are markedly different from the results for mutual funds, where persistence has been difficult to detect and, when detected, tends to be driven by persistent underperformance. We investigate whether selection biases, risk levels, or industry differences can explain the results, but conclude that they are unlikely to do so.

Third, we...