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November 26, 2006

Summary of Recent Venture Capital Research

While the stuff is sometimes unintentionally hilarious, there is a burgeoning academic industry in venture capital research -- and it's now and then worth a scan. The following papers have all recently appeared in academic journals (even if some of them have been floating around as working papers for considerably longer):

• The size of venture capital and private equity fund portfolios. The gist: There is an optimal size of a VC's portfolio, and the answer is ... it depends.
• Crowding out private equity: Canadian evidence. The gist: Tax advantaged private equity funds have crowded out more orthodox funds from the Canadian market, with the result being less available venture capital.
• IPOs, acquisitions, and the use of convertible securities in venture capital. The gist: VCs aren't just being pricks when they use convertible preferred shares in company financings -- they're being smart, wealth-maximizing pricks.
  
• What you are is what you like -- Similarity biases in venture capitalists' evaluations of startup teams. The gist: VCs like to invest in people who remind them of themselves.
  
• How venture capitalists respond to unmet expectations: The role of social environment. The gist: Inexperienced VCs panic at the first sign of a problem in portfolio companies, while more experienced VCs try to work it out -- and then they panic.
  

If I had to suggest just one to read I'd suggest Frank, et al.'s November 2006 paper above from the Journal of Business Venturing on how VCs like to invest in people who, you know, remind them of themselves. It would save entrepreneurs a lot of grief -- both pre- and post-investment -- if they understood how much every VC sees the world through an idiosyncratic (ahem) and different lens.

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