Venture Capital Investment Cycles The Role of Experience and Specialization
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Venture Capital Investment Cycles The Role of Experience and Specialization
Venture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationinary. Please Do Not Quote Without Authors’ PermissionThe central goal of organizational economics is to understand how organizational structure affects behavior and performance. This paper attempts to add to our understanding of organizations by looking closely at the investment behavior and perfor Venture Capital Investment Cycles The Role of Experience and Specializationmance of different types of venture capital firms. Our findings appear most consistent with the view that industry-specific experience and human capitVenture Capital Investment Cycles The Role of Experience and Specialization
al enables firm to react to investment opportunities in the industry. We find that venture capital firms with the most industry experience increase thVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationfirms with relatively little industry experience and those with considerable experience but in other industries. These findings are also consistent with the view that when firms are diversified in other sectors, it is difficult to redeploy human and financial capital from those other sectors. The ev Venture Capital Investment Cycles The Role of Experience and Specializationidence conflicts with the efficient internal capital market perspective as well as the view that entrants are critical to explaining the expansion ofVenture Capital Investment Cycles The Role of Experience and Specialization
venture capital within in an industry.* Harvard University. Gompers, Lerner, and Scharfstein are also affiliates of the National Bureau of Economic ReVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationseminar participants at the University of Chicago for helpful comments. Harvard Business School's Division of Research provided financial assistance. All errors and omissions are our own.1. IntroductionThe central goal of organizational economics is to understand how organizational structure affects Venture Capital Investment Cycles The Role of Experience and Specialization behavior and performance. This paper attempts to add to our understanding of organizations by looking closely at the investment behavior and performaVenture Capital Investment Cycles The Role of Experience and Specialization
nce of different types of venture capital firms. This setting is a good one for studying the effects of organizational structure for three reasons. FiVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationy', while others take a more generalist approach. There are also substantial differences in the experience levels of venture capital firms, with some firms being relatively new entrants and others dating themselves to the beginning of the industry. A second reason to study organizations in the envir Venture Capital Investment Cycles The Role of Experience and Specializationonment of venture capital is that we can get detailed information on their specific investments and we can measure the outcomes of these investments.Venture Capital Investment Cycles The Role of Experience and Specialization
Thus, investment behavior and performance can be measured at a much finer level than is typically the case in studies of organizations based on more aVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationand performance change rapidly. Understanding how organizations respond to large external changes may be the key to understanding how organizational characteristics affect behavior and performance.We explore three potential hypotheses about which type of venture capital firms reacts to changes in th Venture Capital Investment Cycles The Role of Experience and Specializatione investment opportunity set and how it impacts their performance. First, capital constraints (both financial and human) on small firms may prevent thVenture Capital Investment Cycles The Role of Experience and Specialization
emfrom quickly pursuing new opportunities in d particular industry. Large, experienced venture funds with ready access to capital therefore may disproVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationor ability to add value) may help films that specialize within a sec lor to belter and more quickly exploit those opportunities. Finally, new venture films may be able to spot opportunities more quickly and invest in those sec tors before older venture groups have an opportunity to ramp up investmen Venture Capital Investment Cycles The Role of Experience and Specializationts.Our findings appear most consistent with the view that industry-specific experience and human capital enables firms to react to investment opportunVenture Capital Investment Cycles The Role of Experience and Specialization
ities in the industry'. We find that venture capital firms with the most industry' experience increase their investments the most when industry investVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specialization — initial public offerings and Tobin’s q. Their reaction to an increase in these measures is greater than the reaction of venture capital firms with relatively little industry experience and those with considerable experience but in other industries.Although films with more indusny experience incre Venture Capital Investment Cycles The Role of Experience and Specializationase their investments in response lo ĨPO activity and Tobin's q, it is reasonable to question whether these investments arc worthwhile. Thus, we lookVenture Capital Investment Cycles The Role of Experience and Specialization
at the success rates for investments made in response lo ĨPO activity and q. We find only a small reduction in the success rale despite big increases Venture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationl groups within an industry increases in hot markets.These findings are consistent the view that when firms are diversified it is difficult for them to redeploy human and financial capital across sectors. The evidence thus suggests that the internal market for financial and human capital within vent Venture Capital Investment Cycles The Role of Experience and Specializationure capital firms does not operate so smoothly. The evidence also suggests that that entrants are not critical to explaining the cyclical nature of veVenture Capital Investment Cycles The Role of Experience and Specialization
nture capital activity within an industry.This paper is organized as follows. The next section describes the construction of the data and provides somVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specialization the determinants of venture capital firm investment activity, comparing firms along various measures of experience and specialization. In that section, we also look at the determinants of successful investments both in terms of the investment cycle and the characteristics of the venture capital fir Venture Capital Investment Cycles The Role of Experience and Specializationms. Section 5 concludes the paper.2. FrameworkIn this paper, our focus is on the effect of organizational experience and specialization on venture capVenture Capital Investment Cycles The Role of Experience and Specialization
ital investment behavior and performance over the venture capital cycle.1 We ask the following basic question. When there are increased investment1 SeVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationpecialization and economic growth (e.g., Romer (1987)). The most relevant empirical work includes the analysis by Berger, et al. (2002) of the lending practices of small and large banks and Garicano and Hubbard’s (2003. 2004). studies of how law fimt specialization and organization structure varies Venture Capital Investment Cycles The Role of Experience and Specializationwith market size and the value of knowledge-sharing. Similarly, a recent theoretical paper by Fulghieri and Sevilier (2004) examines the factors thatVenture Capital Investment Cycles The Role of Experience and Specialization
influence the choice of a3opportunities within an industry what types of firms take advantage of these opportunities? There are a number of streams ofVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationeir investments in the industry. These firms may already have financial capital under management that they can redeploy from other sectors. They also have reputations and an established network of limited partners such that they can raise additional capital more easily. Gompers (1996) shows that new Venture Capital Investment Cycles The Role of Experience and Specialization firms need to demonstrate a track record in order to raise a new fund while experienced firms can more easily raise capital. Gompers and Lerner (1998Venture Capital Investment Cycles The Role of Experience and Specialization
) look at the determinants of fundraising as well and find that more experienced firms are able to raise substantially larger funds than less experienVenture Capital Investment Cycles: The Role of Experience and SpecializationPaul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein’38300Prelimi Venture Capital Investment Cycles The Role of Experience and Specializationden increases in the investment opportunity set in a particular industry' that is signaled by an increase in the IPO market.2 If capital constraints were critical, we would then expect that, overall experience would dominate industry-specific experience in predicting the response to changes in the i Venture Capital Investment Cycles The Role of Experience and Specializationndustry investment opportunity set.In a related view, the largest firms also have access to a large pool of human capital that they can redeploy fromVenture Capital Investment Cycles The Role of Experience and Specialization
other sectors to make investments in industries with more opportunities for investment. This is a variant of Stein’s (1997) model of the benefits of iGọi ngay
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