How much do they make by just standing there? Deal flow allocation as a structural determinant of VC performance

Mikko Jääskeläinen, Hana Milanov

Research output: Chapter in Book/Report/Conference proceedingConference contributionScientificpeer-review

Abstract

This study suggests a theoretical complement to thus far proposed explanations of disproportion- ate returns in the venture capital industry. Departing from a focus on rm-speci c resources, we develop a model and simulate a process of hierarchical market allocation, in which the most promising ventures are allocated to venture capital rms (VCFs) in the order of a generally shared criterion, such as reputation, status, or expected value of VCF’s contribution to venture. The sec- ond part of the study tests proposed relationships from the simulation on a sample of 227 US early stage VC funds. The ndings suggest that the mechanism of hierarchical market allocation is a signi cant driver of systemic differences in VCFs’ performance. Importantly, this effect is not speci c to characteristics of any individual VCF, but to the VCF’s position in the hierarchy. Both simulation and empirical ndings show that performance of the VCF is curvilinearly related to the position in hierarchy: the higher up the VCF moves in the hierarchy, the higher the marginal effect on performance.
Original languageEnglish
Title of host publicationFrontiers of Entrepreneurship Research
Pages19-33
Volume31
Publication statusPublished - 2011
MoE publication typeA4 Article in a conference publication

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