Venture Capital Reputation
The Oxford Handbook of Venture Capital, Chapter 4, 61-129, Oxford University Press, Douglas Cumming, Ed.,
For financial intermediaries that operate in a highly fragmented industry, such as venture capital (VC) firms, reputation is highly valuable in building credibility with entrepreneurs and investors and enhancing business relationships. A strong reputation benefits both a VC firm’s investors and principals and its portfolio companies by making exits from venture investments more profitable and likely. In this survey piece, we compare the associations of a variety of alternative reputation measures for the lead (largest) investor in the VC syndicate with the VC’s portfolio company performance measured by the probability of future IPOs and post-IPO long-run performance metrics. We examine the following VC reputation measures: 1) a VC’s market share of all venture backed IPOs in the immediately preceding 3 calendar years; 2) the number of completed IPOs in a VC’s portfolio over the prior 3 calendar years relative to the number of companies it actively invested in; 3) the value-weighted proportion of a VC’s IPO investments relative to its total investments; 4) the age of a VC firm; 5) the capital under a VC firm’s management; and 6) a VC firm’s total investment in portfolio firms. We document that past IPO success measured by the first three VC reputation measures above have significant predictive power for subsequent IPO success. Importantly, only the first reputation measure, VC IPO Market Share, has significant explanatory power across all the post-IPO long-run performance measures we examine, while the other VC reputation measures are sometimes significant. This result holds even after controlling for selection bias. We also find two variants of VC IPO Market Share, the cumulative IPO market share measure and the average of the VC syndicate IPO market share measure, yield qualitatively similar, albeit weaker, associations with long-run post-IPO performance measures. An appendix to this survey lists the 1000 most reputable VCs and their year-by-year VC IPO Market Share reputation measure for use in future studies.