Abstract: We study how global private capital investors make decisions. First, we document the globalization of venture capital (VC) and private equity (PE) and show that, while absolute returns are highest in developed markets (DM), public market equivalent performance in many emerging markets (EM) is strong. Second, in partnership with the International Finance Corporation, we field a worldwide experimental survey across 105 countries, reaching 1,315 VC and PE investors ac- counting for around $1.5 trillion in assets under management. Our experiment shows that, when evaluating investment opportunities, investors place the greatest weight on firm traction and financial performance and react strongly to regional and country risk factors; other company and team attributes matter less. Our survey further examines how investors source and select deals, structure contracts, manage risk, create value post-investment, and exit investments. EM and DM investors operate similarly, but differ starkly in how they deal with risk, especially political and currency risk. Together, our results shed some of the first light on how high-growth firms and entrepreneurs are financed around the world.
Discussant: Will Gornall, University of British Columbia
Vladimir Ivanov, Securities and Exchange Commission
Christo Pirinsky, University of Central Florida
Abstract: The compensation of general partners in most private equity firms is linked to the performance of the firm’s individual funds rather than its aggregate performance. We argue this compensation structure provides incentives for general partners to arrange assets across funds in a manner that increases fees collected from investors. We refer to this practice as asset sorting and document its prevalence in the venture capital industry over the last forty years. While asset sorting could facilitate specialization, VC firms group investments with correlated payoffs together even when the benefits of specialization appear limited. Furthermore, sorting does not enhance investment performance or reward VC firms for their reputation, pointing to a potential agency conflict in the industry.
Abstract: I examine how the breadth of venture capital (VC) partners' human capital influences investment selection, startup performance, and innovation. Partners with broader human capital are more likely to lead investments in novel startups with previously unexplored business models and significantly increase their likelihood of major success; however, they underperform when leading non-novel deals. Exploiting plausibly exogenous variation in partner time constraints as a shock to the within-VC firm likelihood of leading a deal, I provide causal evidence for these effects. A theoretical model endogenizes startup creation, partner assignment, and investment to rationalize the empirical findings and provide additional testable predictions. The results highlight the nuanced value of human capital breadth in financing innovation.
