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

Abstract

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.

Moving Beyond the Valley of Death: Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms

“…It appears that the signals conferred by the EU-ODA allowed VCs to select higher quality firms earlier and move them to IPO. This trend reversal should be viewed positively for investors since IPOs, on average, have higher returns than acquisitions (Smith et al, 2011). Importantly, we do not see any statistically significant difference in bankruptcies for firms affected by the EU-ODA.…”

Moving Beyond the Valley of Death: Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms

“…It appears that the signals conferred by the EU-ODA allowed VCs to select higher quality firms earlier and move them to IPO. This trend 4 reversal should be viewed positively for investors since IPOs, on average, have higher returns than acquisitions (Smith et al, 2011). Importantly, we do not see any statistically significant difference in bankruptcies for firms affected by the EU-ODA.…”

How Does Uncertainty Resolution Affect VC Syndication?

“…Ball et al (2011) examine VC-backed firms' exit choice and test hypotheses that levels and relative shares of IPO and acquisitions are affected by marketing timing or pseudo market timing. 4 Smith, Pedace, and Sathe (2011) provide the relationship between fund outcomes and investment performance. Although the percentage of successful IPO exits is the most important fund outcome, the percentage of exits by acquisitions is almost as important an attribution to a VC fund's performance.…”