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P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
CHAPTER 19
Returns to Venture CapitalMIKE WRIGHTProfessor of Financial
Studies, Centre for Management Buy-Out Research,Nottingham
University Business School
RIYA CHOPRAAResearcher, Centre for Management Buy-Out
Research,Nottingham University Business School
INTRODUCTIONThe returns to private equity investment have become
a vexed issue, attractingwidespread debate in the media,
government, and among researchers. Much ofthe attention has focused
on later-stage buyout investments, but there is a generalmove
towards greater transparency and disclosure of the returns to both
earlyand late-stage venture capital (VC) investments. Shortcomings
in the informationprovided to investors may mean that limited
partners are restricted in their abilityto judge the investment
record of the VC funds in which they seek to invest.
In this chapter, returns are examined at two levels. First, we
examine returnsat the level of VC funds. Second, returns at the
investee firm level are discussed.The literature on returns to
venture capital is, unsurprisingly, mainly concentratedin finance
and economics journals, but a stream of studies has also appeared
inentrepreneurship journals.
Reviews of the literature relating to the different stages of
the venture capitalinvestment process, from deal sourcing through
to exit, are available in Wrightand Robbie (1998) and Wright,
Sapienza, and Busenitz, (2003). In this review, wefocus
specifically on the earlier venture capital stage of the private
equity market.Comparisons are made with the later management buyout
stage of this marketwhere appropriate and where studies are
available. Detailed surveys of the laterbuyout stage of the private
equity market are available in Wright (2007); Cumming,Siegel, and
Wright (2007); and Bruining and Wright (2008). The main findings
fromthe studies reviewed are summarized in Exhibit 19.1.
STRUCTURE OF VC FUND RETURNSThe venture capital fund manager
receives a fee for the management of the fundsand a share in the
profits of the fund (Gilligan and Wright 2008). However, the
feesreceived are typically an advance on carried interest, not in
addition to the share
407
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Printer Name: Hamilton
Exh
ibit
19.1
Sum
mar
yof
Stud
ies
ofR
etur
nsto
Ven
ture
Cap
ital
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Gom
pers
and
Ler
ner
(199
9)
419
U.S
.ven
ture
capi
tal
part
ners
hip
agre
emen
tsan
dof
feri
ngm
emor
and
afo
rfu
nds
form
edbe
twee
n19
78an
d19
92
Part
ners
hip
agre
emen
tsco
llect
edby
thre
eor
gani
sati
ons:
Aen
eas
Gro
up,K
empe
rFi
nanc
ial
Serv
ices
,and
Ven
ture
Eco
nom
ics
Mul
tiva
riat
ere
gres
sion
anal
ysis
,inc
lud
ing
Ord
inar
yL
east
Squa
re(O
LS)
anal
ysis
Com
pens
atio
nof
esta
blis
hed
fund
sis
sign
ifica
ntly
mor
ese
nsit
ive
tope
rfor
man
cean
dm
ore
vari
able
than
that
ofot
her
fund
s.O
lder
and
larg
erfu
nds
have
low
erba
seco
mpe
nsat
ion,
and
perf
orm
ance
and
pay
sens
itiv
ity
do
nota
ppea
rto
bere
late
d.
Dix
on(1
991)
30L
ond
on-b
ased
spec
ialis
tU
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ntur
eca
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mpa
nies
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liste
don
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Hay
war
dan
dre
pres
ente
dap
prox
imat
ely
20%
ofth
eto
taln
umbe
rof
UK
fund
s
Inte
rvie
ws
wit
hth
eex
ecut
ives
cons
truc
ted
arou
nda
ques
tion
nair
e
Mea
nsc
ores
,pe
rcen
tage
sof
tota
lsa
mpl
em
enti
onin
git
and
stan
dar
dd
evia
tion
s
The
mos
tim
port
antf
acto
rve
ntur
eca
pita
lists
look
for
ina
prop
osed
inve
stm
enti
sth
eex
peri
ence
ofth
em
anag
emen
ttea
m,o
ver
the
proj
ecte
dre
turn
san
dtu
rnov
er.T
hepr
ojec
t’sfi
nanc
ing
stag
ed
eter
min
esth
eri
skpr
emiu
m,
asth
ere
quir
edra
teof
retu
rnis
anar
bitr
ary
IRR
toth
epr
opos
al,n
otca
lcul
ated
thro
ugh
theo
reti
calp
rici
ngm
odel
s.W
righ
tand
Rob
bie
(199
6)
74U
Kve
ntur
eca
pita
lin
stit
utio
nslis
ted
asfu
ll-ti
me
mem
bers
ofth
eB
riti
shV
entu
reC
apit
alA
ssoc
iati
on(B
VC
A)
Mai
lque
stio
nnai
res
toch
ief
exec
utiv
esof
the
vent
ure
capi
talfi
rms
orse
nior
colle
ague
s
Mea
nsc
ores
,Sta
ndar
dD
evia
tion
,and
Man
n-W
hitn
eyU
test
ofd
iffe
renc
es
Ven
ture
capi
talis
tsm
ake
grea
ter
use
ofd
isco
unte
dca
shfl
owap
proa
ches
and
less
use
ofas
set-
base
dm
etho
ds,
refl
ecti
ngth
eus
eof
IRR
sas
anim
port
anti
ndic
ator
ofin
vest
men
tpe
rfor
man
ce.T
hey
also
use
wid
eno
nfina
ncia
lin
form
atio
nto
test
the
robu
stne
ssof
the
acco
unti
ngan
dfi
nanc
ialp
roje
ctio
ns.
Man
igar
teta
l.(1
997)
136
vent
ure
capi
talfi
rms
from
UK
,Fra
nce,
Net
herl
and
s,an
dB
elgi
um.
Que
stio
nnai
res
fille
dby
the
seni
orm
anag
ers
ofth
eve
ntur
eca
pita
lfirm
s
Cor
rela
tion
anal
ysis
The
mos
twid
ely
used
valu
atio
nm
etho
din
the
UK
ism
ulti
plic
atio
nof
past
/fu
ture
earn
ings
wit
hso
me
pric
e-ea
rnin
gra
tio.
Inth
eN
ethe
rlan
ds
and
Bel
gium
itis
the
dis
coun
ting
offu
ture
cash
flow
s,an
din
Fran
ceit
isth
ebo
okva
lue
ofne
twor
th.
408
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Man
igar
teta
l.(2
002)
209
vent
ure
capi
talc
ompa
nies
(66
from
UK
,73
from
U.S
.,32
from
Fran
ce,2
4fr
omN
ethe
rlan
ds
and
14fr
omB
elgi
um)
Que
stio
nnai
resu
rvey
Chi
-squ
are
anal
yses
,lim
ited
dep
end
ent
vari
able
(LD
V)
tech
niqu
ean
dor
din
ary
leas
tsqu
are
(OL
S)re
gres
sion
s
Stag
ed
iver
sifi
cati
onis
asso
ciat
edw
ith
low
erre
quir
edre
turn
sfo
rea
rly-
stag
eve
ntur
es.
Bei
ngle
adin
vest
orm
ore
ofte
nis
asso
ciat
edw
ith
low
erre
quir
edre
turn
sfo
rea
rly-
stag
ein
vest
men
tsan
dfe
wer
inve
stm
ents
per
VC
man
ager
asso
ciat
edw
ith
high
erre
quir
edre
turn
s.T
here
quir
edre
turn
sfo
rin
dep
end
ent
VC
Cs
are
sign
ifica
ntly
high
erth
anfo
rca
ptiv
ean
dpu
blic
lysu
ppor
ted
firm
sfo
rea
rly-
stag
ean
dex
pans
ion-
stag
ein
vest
men
ts.
Kar
saie
tal.
(199
9)18
vent
ure
capi
talfi
rms
(9fr
omH
unga
ry,6
from
Pola
ndan
d3
from
Slov
akia
)
Que
stio
nnai
resu
rvey
san
din
terv
iew
sad
min
iste
red
toth
em
anag
ers
inth
eV
Cfi
rms
Mea
nsc
ores
onth
eba
sis
of1
=no
tim
port
antt
hrou
ghto
5=
very
impo
rtan
t
Hun
gary
and
Pola
ndha
veex
peri
ence
dm
arke
dgr
owth
inth
eir
vent
ure
capi
talm
arke
ts,w
ith
the
VC
firm
sex
hibi
ting
grea
ter
invo
lvem
ent
inth
em
onit
orin
gof
thei
rin
vest
ees,
whi
leSl
ovak
iare
mai
nsun
der
dev
elop
ed,a
ndV
Cfi
rms
inal
lthr
eeco
untr
ies
have
less
invo
lvem
enti
nst
rate
gic
dec
isio
nsan
dm
ore
invo
lvem
enti
nop
erat
iona
ldec
isio
ns,w
ith
maj
orin
fras
truc
tura
lim
ped
imen
ts.
Rob
bie
etal
.(1
997)
77U
Kve
ntur
eca
pita
lfirm
s,w
hich
wer
efu
ll-ti
me
mem
bers
ofth
eB
riti
shV
entu
reC
apit
alA
ssoc
iati
on(B
VC
A)i
n19
96
Ase
ries
ofin
-dep
thfa
ce-t
o-fa
cein
terv
iew
sba
sed
ona
stru
ctur
edqu
esti
onna
ire
chec
klis
t,fo
llow
edby
am
aile
dqu
esti
onna
ire
surv
eyto
the
rem
aini
ngU
Kve
ntur
eca
pita
lfirm
s(w
hich
wer
em
embe
rsof
BV
CA
)not
cove
red
inth
efir
stst
age
Chi
-squ
are
test
ofin
dep
end
ence
toan
alyz
eth
ed
iffe
renc
ebe
twee
nin
dep
end
ent
and
noni
ndep
end
ent
vent
ure
capi
talfi
rms.
The
reex
ists
ash
iftt
owar
ds
targ
etIR
Rs
seti
nre
lati
onto
retu
rns
onot
her
asse
tcla
sses
orre
turn
sfo
rou
tper
form
ers
inth
eve
ntur
eca
pita
lsec
tor.
An
incr
ease
dam
ount
ofpe
rfor
man
ceta
rget
sar
eex
pres
sed
inte
rms
ofta
rget
IRR
san
dca
sham
ount
sge
nera
ted
.
(Con
tinu
ed)
409
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Loc
kett
,M
urra
y,an
dW
righ
t(2
002)
60V
Cfir
ms,
whi
chw
ere
full
(inv
esti
ng)m
embe
rsof
the
Bri
tish
Ven
ture
Cap
ital
Ass
ocia
tion
(BV
CA
)in
1999
–200
0
Tele
phon
ein
terv
iew
sco
nduc
ted
wit
hth
ere
pres
enta
tive
sof
the
vent
ure
capi
talfi
rms
Z-t
ests
ofpr
opor
tion
s,M
ann-
Whi
tney
Z-t
est
stat
isti
csan
dW
ilcox
onsi
gned
rank
ste
stZ
stat
isti
cs.
Mor
ege
nera
listfi
rms
are
now
mak
ing
mor
ein
vest
men
tsin
tech
nolo
gy-b
ased
com
pani
es.
Targ
etIR
Rs
for
tech
nolo
gy-b
ased
inve
stm
ents
are
high
erth
anth
eno
n–te
chno
logy
-bas
edon
esat
the
sam
est
age.
Byg
rave
(199
4)A
llU
.S.f
und
sfo
rmed
from
1969
thro
ugh
1985
Ven
ture
Eco
nom
ics’
Inve
stm
entB
ench
mar
ksR
epor
t.
Wei
ghte
dav
erag
esT
hem
edia
nIR
Rpe
aked
in19
82at
27%
,wit
hw
eigh
ted
aver
age
at32
%.
Kle
iman
and
Shul
man
(199
2)
14Sm
allB
usin
ess
Inve
stm
ent
Com
pani
es(S
BIC
s)an
d12
Bus
ines
sD
evel
opm
ent
Cor
pora
tion
s(B
DC
s),t
hat
star
ted
afte
r19
80or
dis
solv
edbe
fore
1990
Ven
ture
Cap
ital
Jour
nal,
publ
icly
avai
labl
est
ock
pric
esan
dN
ASD
AQ
mon
thly
retu
rns
Mar
ketm
odel
usin
gSc
hole
san
dW
illia
m(1
977)
tech
niqu
ean
dco
mpu
ting
cum
ulat
ive
retu
rnof
the
fund
s
From
1980
to19
86,S
BIC
sd
emon
stra
tesi
gnifi
cant
lygr
eate
ran
dun
syst
emat
icri
skbu
tsig
nifi
cant
lyle
sssy
stem
atic
risk
than
BD
Cs.
SBIC
sex
peri
ence
muc
hhi
gher
retu
rns,
ona
risk
adju
sted
basi
s,th
anei
ther
the
mar
ketp
roxy
and
BD
Cs.
Hun
tsm
anan
dH
oban
(198
0)
Ret
urns
gene
rate
dby
110
priv
ate
equi
tyin
vest
men
tsbe
twee
n19
60an
d19
75,
wit
hin
vest
men
tsiz
era
ngin
gfr
om$1
000
to$1
.1m
illio
n.
Thr
eew
ell-
know
nve
ntur
eca
pita
lfirm
s(a
publ
icly
-hel
dSm
all
Bus
ines
sIn
vest
men
tC
ompa
ny,a
part
ners
hip
and
aw
holly
-ow
ned
SBIC
subs
idia
ryof
ala
rge
bank
hold
ing
com
pany
),ea
chre
pres
enti
nga
dif
fere
ntty
peof
inst
itut
ion
Alg
orit
hmd
evel
oped
byL
awre
nce
Fish
erA
nat
trac
tive
rate
ofre
turn
can
bege
nera
ted
over
tim
eby
wel
l-d
iver
sifi
edve
ntur
epo
rtfo
lios.
Ad
equa
ted
iver
sifi
cati
onre
quir
esgr
eate
rm
inim
alca
pita
llev
els
than
may
beth
eca
sefo
rpo
rtfo
lios
cont
aini
ngse
curi
ties
ofm
ore
mat
ure
ente
rpri
ses
wit
hre
adily
mar
keta
ble
secu
riti
es.
Bro
phy
and
Gut
hner
(198
8)
12pu
blic
lytr
aded
vent
ure
capi
talf
und
sin
exis
tenc
ed
urin
gth
eti
me
peri
odfr
omM
ay19
81to
Febr
uary
1985
and
12op
en-e
nded
mut
ualf
und
s
Com
puse
rve
Exe
cuti
veD
ata
Serv
ice
and
S&P
Dai
lyPr
ice
Ind
ex
Scho
les
and
Will
iam
son
(197
7)be
taes
tim
atio
nte
chni
que
Supe
rior
resu
lts
are
real
ized
onpu
blic
lytr
aded
vent
ure
capi
talf
und
sw
hen
com
pare
dw
ith
port
folio
sof
grow
th-o
rien
ted
mut
ualf
und
san
dw
ith
the
S&P
500
ind
ex.
410
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Lju
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stin
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inve
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erre
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hen
inve
stm
ent
oppo
rtun
itie
sim
prov
ean
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rca
pita
linc
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ncre
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lead
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mpe
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onfo
rd
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ivat
eeq
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fund
man
ager
sre
spon
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cutt
ing
thei
rin
vest
men
tspe
ndin
g.C
ochr
ane
(200
5)16
,613
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ncin
gro
und
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ith
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com
pani
esan
da
tota
lof
$112
,613
mill
ion
rais
ed
Ven
ture
One
dat
abas
e,SD
CPl
atin
umC
orpo
rate
New
Issu
esan
dM
erge
rsan
dA
cqui
siti
on(M
&A
)d
atab
ases
,Mar
ket-
Gui
de,
and
othe
ron
line
reso
urce
s.
The
smal
lest
Nas
daq
stoc
ksha
vesi
mila
rla
rge
mea
ns,v
olat
iliti
es,a
ndar
ithm
etic
alph
as,
confi
rmin
gth
atth
ere
mai
ning
puzz
les
are
not
spec
ialt
ove
ntur
eca
pita
l.
Phal
ippo
u(2
007)
NA
NA
Lit
erA
ture
revi
ewof
issu
esfa
ced
bypr
ivat
eeq
uity
inve
stor
s
The
aver
age
inve
stor
has
obta
ined
poor
retu
rns
from
inve
stm
ents
inpr
ivat
eeq
uity
fund
s,po
tent
ially
beca
use
ofex
cess
ive
fees
.In
vest
ors
need
toga
infa
mili
arit
yw
ith
actu
alri
sk,p
astr
etur
ns,a
ndsp
ecifi
cfe
atur
esof
priv
ate
equi
tyfu
nds.
(Con
tinu
ed)
411
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Hw
ang
etal
.(2
005)
5607
uniq
uefi
rms
wit
hfi
nanc
ing
dat
afo
ra
tota
lof
12,5
53ro
und
sof
fund
ing,
incl
udin
g97
06ro
und
sof
priv
ate
equi
tyfi
nanc
ing,
plus
1307
IPO
s,89
6ac
quis
itio
nsan
d64
4sh
utd
owns
,cov
erin
gth
epe
riod
from
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ary
1,19
87to
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ch31
,200
0
Sand
Hill
Eco
nom
etri
csd
atab
ase
Rep
eatv
alua
tion
mod
elpl
usa
corr
ecti
onfo
rse
lect
ion
bias
The
auth
ors
repo
rta
met
hod
for
build
ing
anin
dex
for
vent
ure
capi
talt
hatc
anbe
used
inm
uch
the
sam
em
anne
rth
atth
eN
ASD
AQ
and
S&P
500
are
used
asin
dic
esof
pric
esof
com
mon
stoc
k.
Kap
lan
and
Scho
ar(2
005)
Two
sam
ples
offu
nds
cove
ring
the
peri
odfr
om19
80to
1997
,exc
lud
ing
one
wit
hle
ssth
an$5
mill
ion
ofco
mm
itte
dca
pita
l.T
hefi
rst
sam
ple
cons
ists
of74
6fu
nds,
offic
ially
liqui
dat
edor
star
ted
befo
re19
95.T
hese
cond
sam
ple
cons
ists
of10
90fu
nds,
offic
ially
liqui
dat
edor
star
ted
befo
re19
97
Ven
ture
Eco
nom
ics
Reg
ress
ion
anal
ysis
Ave
rage
fund
retu
rns
(net
offe
es)
appr
oxim
atel
yeq
ualt
heS&
P50
0al
thou
ghsu
bsta
ntia
lhet
erog
enei
tyac
ross
fund
sex
ists
.R
etur
nspe
rsis
tstr
ongl
yac
ross
subs
eque
ntfu
nds
ofa
part
ners
hip.
Bet
ter
perf
orm
ing
part
ners
hips
are
mor
elik
ely
tora
ise
follo
w-o
nfu
nds
and
larg
erfu
nds.
Thi
sre
lati
onsh
ipis
conc
ave,
soto
ppe
rfor
min
gpa
rtne
rshi
psgr
owpr
opor
tion
ally
less
than
aver
age
perf
orm
ers.
412
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Phal
ippo
uan
dG
otts
chal
g(2
009)
Bas
esa
mpl
eco
mpr
isin
g85
2fu
nds
rais
edbe
twee
n19
80an
d19
93,w
hich
are
old
erth
an10
year
sw
ith
size
mor
eth
an$5
mill
ion.
The
add
itio
nals
ampl
eco
ntai
ns47
6d
iffe
rent
fund
sra
ised
betw
een
1980
and
1993
wit
hm
ore
than
5in
vest
men
tsin
the
“inv
estm
entd
atas
et.”
Mer
ged
toge
ther
,the
base
and
the
add
itio
nals
ampl
em
ake
wha
tis
calle
dth
e“e
xten
ded
sam
ple”
inth
est
udy.
Ven
ture
Xpe
rtR
egre
ssio
nan
alys
is.
Ave
rage
perf
orm
ance
(net
-of-
fees
)off
und
sis
low
erth
anth
atof
S&P
500
by3%
per
year
,but
gros
s-of
-fee
spe
rfor
man
ceis
abov
eth
atof
the
S&P
500
by3%
per
year
.New
lyra
ised
fund
sha
vea
perf
orm
ance
sim
ilar
toth
atof
sam
ple
fund
sat
the
sam
eag
e.It
isal
soim
port
antt
oke
epin
min
dth
atth
ere
isw
ide
dis
pers
ion
inpe
rfor
man
cean
dth
atpe
rfor
man
ceis
pred
icta
ble
toa
cert
ain
exte
nton
ly.
Met
rick
and
Yasu
da
(200
7)
238
fund
s,of
whi
ch94
are
vent
ure
capi
talf
und
san
d14
4ar
ebu
yout
fund
s,ra
ised
betw
een
1993
and
2006
.The
sefu
nds
repr
esen
tal
lpro
spec
tive
fund
sth
atth
eIn
vest
orco
nsid
ered
inve
stin
gin
,not
just
the
fund
sit
end
edup
inve
stin
gin
.
Dat
afr
omon
eof
the
larg
est
priv
ate
equi
tylim
ited
part
ners
inth
ew
orld
,re
ferr
edto
as“t
heIn
vest
or”
inth
est
udy.
Oth
erso
urce
sof
dat
aar
eG
alan
te’s
Ven
ture
Cap
ital
and
Priv
ate
Equ
ity
Dir
ecto
ry(A
sset
Alt
erna
tive
s,20
06),
Priv
ate
Equ
ity.
Perf
orm
ance
Mon
itor
2006
(Pri
vate
Equ
ity.
Inte
llige
nce,
2006
),an
dIn
vest
men
tB
ench
mar
ksR
epor
tpu
blis
hed
byV
entu
reE
cono
mic
s(2
006a
and
2006
b).
Reg
ress
ion
anal
ysis
.B
uyou
t(B
O)f
und
man
gers
build
onth
eir
prio
rex
peri
ence
byin
crea
sing
the
size
ofth
eir
fund
sfa
ster
than
vent
ure
capi
tal(
VC
)m
anag
ers
do,
lead
ing
tosi
gnifi
cant
lyhi
gher
reve
nue
per
part
ner
and
per
prof
essi
onal
inla
ter
BO
fund
s.B
Obu
sine
ssis
mor
esc
alab
leth
anth
eV
Cbu
sine
ss,a
ndpa
stsu
cces
sha
sa
dif
fere
ntia
lim
pact
onth
ete
rms
ofth
eir
futu
refu
nds.
(Con
tinu
ed)
413
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Hel
lman
nan
dPu
ri(2
000)
149
star
t-up
com
pani
es,w
ith
lega
lage
nool
der
than
10ye
ars
and
wit
hm
ore
than
10em
ploy
ees,
that
are
loca
ted
inC
alif
orni
a’s
Silic
onV
alle
y.
An
asso
rtm
ents
ofsu
rvey
s,pu
blic
lyav
aila
ble
info
rmat
ion,
and
com
mer
cial
dat
abas
es(V
entu
reO
nean
dV
entu
reE
cono
mic
s)
Cox
prop
orti
onal
haza
rdre
gres
sion
mod
el
Inno
vato
rfi
rms
are
mor
elik
ely
toob
tain
vent
ure
capi
talt
han
imit
ator
firm
s.V
entu
reca
pita
lis
asso
ciat
edw
ith
asi
gnifi
cant
red
ucti
onin
the
tim
eto
brin
ga
prod
uctt
om
arke
t,es
peci
ally
for
inno
vato
rs.
Eng
elan
dK
eilb
ach
(200
7)
2137
5no
n–ve
ntur
e-fu
nded
and
142
vent
ure-
fund
edfir
ms,
foun
ded
betw
een
1995
and
1998
,wit
hat
leas
ton
epa
tent
appl
icat
ion
and
atle
astt
wo
entr
ies
wit
hre
spec
tto
thei
rfir
msi
zeto
enab
leco
mpu
tati
onof
agr
owth
rate
Mic
role
veld
atab
ase
onG
erm
anfi
rms
dev
elop
edan
dm
aint
aine
dby
ZE
Win
Man
nhei
m,G
erm
any
and
DPA
dat
abas
e(P
AT
DPA
)
Prob
ites
tim
atio
nof
prop
ensi
tysc
ores
Firm
sw
ith
high
erin
nova
tive
outp
utan
dw
ith
ahi
ghly
educ
ated
man
agem
enth
ave
ala
rger
prob
abili
tyof
gett
ing
vent
ure
capi
tal.
Ven
ture
-fun
ded
firm
sd
ispl
aysi
gnifi
cant
lyhi
gher
grow
thra
tes
and
larg
ernu
mbe
rsof
pate
ntap
plic
atio
ns,c
ompa
red
toth
eir
non–
vent
ure-
fund
edco
unte
rpar
ts.
Bur
gele
tal.
(200
0)36
2an
d23
2fi
rms
from
UK
and
Ger
man
y,re
spec
tive
ly.
The
sefi
rms
wer
efo
rmed
betw
een
1987
and
1996
and
had
atle
ast3
empl
oyee
sin
1997
and
wer
epr
imar
ilyen
gage
din
the
prod
ucti
onan
dd
evel
opm
ento
fnew
prod
ucts
,ser
vice
s,an
dpr
oces
ses.
Mai
lsur
vey
usin
ga
four
-pag
eid
enti
calq
uest
ionn
aire
for
both
coun
trie
s
OL
San
dpr
obit
regr
essi
onm
odel
sFi
rms
wit
hin
tern
atio
nals
ales
have
high
ersa
les
grow
thth
anfi
rms
that
sell
dom
esti
cally
.Te
chno
logi
cals
ophi
stic
atio
nof
prod
ucts
and
the
expe
rien
ceof
entr
epre
neur
sha
sa
posi
tive
impa
cton
grow
th.
Jain
and
Kin
i(1
995)
136
VC
-bac
ked
and
136
non–
VC
-bac
ked
IPO
s.G
oing
Publ
ic:T
heIP
OR
epor
ter
and
Inve
stm
ent
Dea
lers
Dig
est’s
Five
-yea
rD
irec
tory
ofC
orpo
rate
Fina
ncin
g
Cro
ss-s
ecti
onal
regr
essi
onan
alys
isV
C-b
acke
dIP
Os
exhi
bitr
elat
ivel
ysu
peri
orpo
stis
sue
oper
atin
gpe
rfor
man
ceco
mpa
red
tono
n–V
C-b
acke
dIP
Ofi
rms.
Cap
ital
mar
kets
appe
arto
reco
gnis
eth
eva
lue-
add
edpo
tent
ial
ofV
Cm
onit
orin
g,as
refl
ecte
dd
inth
ehi
gher
valu
atio
nsat
the
tim
eof
IPO
s.
414
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Aud
rets
chan
dL
ehm
ann
(200
4)
341
firm
sth
atar
e/w
ere
liste
don
Neu
erM
arkt
inG
erm
any
betw
een
1997
and
2002
Ind
ivid
ualb
alan
cesh
eetd
ata
from
IPO
pros
pect
uses
,pu
blic
lyav
aila
ble
info
rmat
ion
from
onlin
ed
ata
sour
ces:
Ger
man
Pate
ntO
ffice
and
Deu
tsch
eB
oers
e
Prob
itap
proa
chan
dtw
o-lim
itto
bitm
odel
Ven
ture
capi
tala
ndd
ebtp
rovi
ded
byba
nks
are
notc
ompl
emen
tsbu
tsub
stit
utes
.Ban
kspl
ayon
lya
min
orro
lein
fina
ncin
gan
dco
ntro
lling
inno
vati
vefi
rms.
Bot
tazz
iand
Da
Rin
(200
2)
511
com
pani
esth
atw
ent
publ
icon
Eur
o.nm
from
thei
rin
cept
ion
toD
ecem
ber
2000
Lis
ting
pros
pect
uses
,ann
ual
repo
rts
ofth
eco
mpa
nies
and
fina
ncin
gin
form
atio
nfr
omth
eve
ntur
eca
pita
lists
Prob
itre
gres
sion
anal
ysis
Ven
ture
capi
tali
nE
urop
eis
nots
yste
mat
ical
lyas
soci
ated
wit
hpa
rtic
ular
lyd
ynam
icco
mpa
nies
,whe
ther
inte
rms
ofsa
les
grow
th,
new
empl
oym
ent,
orst
ock
mar
ket
perf
orm
ance
.C
olom
boan
dG
rilli
(200
8)43
9It
alia
nN
ewTe
chno
logy
-Bas
edFi
rms
(NT
BFs
)ope
rati
ngin
high
tech
sect
ors,
esta
blis
hed
betw
een
1/1/
1980
and
1/1/
2000
2004
rele
ase
ofR
esea
rch
Ent
repr
eneu
rshi
pin
Ad
vanc
edTe
chno
logi
es(R
ITA
)dat
abas
e
End
ogen
ous
swit
chin
gre
gres
sion
mod
elFo
und
ers’
hum
anca
pita
lhas
ad
irec
tpos
itiv
eef
fect
onfi
rmgr
owth
.VC
inve
stm
ents
are
attr
acte
dby
the
perc
eive
dm
anag
emen
tco
mpe
tenc
eof
firm
s’fo
und
ing
team
.The
join
tco
nsid
erat
ion
ofhu
man
capi
talv
aria
bles
and
VC
fina
ncin
gha
sth
ead
dit
iona
lad
vant
age
ofhe
lpin
gd
isen
tang
leth
ere
lati
veim
port
ance
of“s
cout
”an
d“c
oach
”fu
ncti
ons
perf
orm
edby
VC
inve
stor
sto
the
adva
ntag
eof
port
folio
NT
BFs
.B
erto
niet
al.
(200
8)55
0It
alia
nN
ewTe
chno
logy
Bas
edFi
rms
(NT
BFs
),ob
serv
edov
era
10-y
ear
peri
od(1
994–
2003
).
Han
dco
llect
edlo
ngit
udin
ald
atas
etd
raw
nfr
omth
e20
04re
leas
eof
the
RIT
A(R
esea
rch
onE
ntre
pren
eurs
hip
inA
dva
nced
Tech
nolo
gies
)
Aug
men
ted
Gib
rat-
law
type
pane
ldat
am
odel
wit
hd
istr
ibut
edla
gsan
dG
MM
-sys
tem
esti
mat
ion
VC
finan
cing
has
apo
siti
veef
fect
onth
esu
bseq
uent
grow
thof
sale
san
dem
ploy
men
tof
port
folio
com
pani
es.T
hem
agni
tud
eof
this
effe
ctd
iffe
rsac
cord
ing
toth
ety
peof
inve
stor
,w
ith
the
bene
fits
ofFV
Cs
cons
ider
ably
exce
edin
gth
ose
ofC
VC
s.A
lem
any
and
Mar
ti(2
005)
323
Span
ish
firm
sth
atar
efu
llyid
enti
fied
and
for
who
mse
para
tefin
anci
alac
coun
tsex
ist
SAB
Idat
abas
e(B
urea
uV
anD
irk)
chi-
squa
red
test
ofd
iffe
renc
ebe
twee
npr
opor
tion
san
dno
npar
amet
ric
test
ofK
rusk
al-W
allis
for
dif
fere
ntfi
rmch
arac
teri
stic
s.
The
reex
ists
asi
gnifi
cant
posi
tive
rela
tion
betw
een
the
cum
ulat
ive
VC
inve
stm
enti
na
firm
and
the
grow
thin
empl
oym
ent,
sale
s,gr
oss
mar
gin,
tota
lass
ets,
neti
ntan
gibl
eas
sets
,and
corp
orat
eta
xes
over
tim
e. (Con
tinu
ed)
415
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Dav
ilaet
al.
(200
3)49
4st
art-
upfir
ms,
ofw
hich
193
are
vent
ure-
back
edan
d30
1ar
eno
n–ve
ntur
e-ba
cked
star
t-up
firm
s.
Seve
ralp
ropr
ieta
ryd
atab
ases
:Tr
ivet
(lea
din
gpr
ofes
sion
alem
ploy
eror
gani
sati
on),
Ven
ture
One
(Reu
ters
),an
dV
entu
reSo
urce
(Ven
ture
Eco
nom
ics)
Aux
iliar
yre
gres
sion
mod
elC
ompa
nies
that
rece
ive
vent
ure
capi
talg
row
fast
erth
anth
eon
esth
atd
idno
thav
eth
isty
peof
fina
ncin
g
Lee
etal
.(2
001)
137
Kor
ean
tech
nolo
gica
lst
art-
upco
mpa
nies
Surv
eyqu
esti
onna
ires
,te
leph
one
inte
rvie
ws
and
Kor
ean
Smal
land
Med
ium
Bus
ines
sA
dm
inis
trat
ion
(KSM
BA
)web
site
.
Lag
ged
dep
end
ent
vari
able
mod
el,u
sing
iden
tica
lfixe
dla
gpe
riod
Tech
nolo
gica
lcap
abili
ties
and
fina
ncia
lre
sour
ces
inve
sted
dur
ing
the
dev
elop
men
tpe
riod
are
posi
tive
lyas
soci
ated
wit
hth
est
art-
ups’
spe
rfor
man
ce.E
ntre
pren
euri
alor
ient
atio
nha
sa
posi
tive
and
mar
gina
llyst
atis
tica
llysi
gnifi
cant
effe
cton
perf
orm
ance
.H
eirm
anan
dC
lary
sse
(200
5)
171
Res
ourc
eB
ased
Star
t-U
ps(R
BSU
s)in
Flan
der
s(B
elgi
um)f
ound
edbe
twee
n19
91an
d20
00.
Stru
ctur
edqu
esti
onna
ires
Uni
(t-t
est,
F-te
sts,
Man
n-W
hitn
eyU
-tes
ts)a
ndm
ulti
vari
ate
(Gen
eral
Lea
stSq
uare
)an
alys
is
Rai
sing
larg
eam
ount
sof
VC
isa
key
dri
ver
for
earl
yem
ploy
men
tand
reve
nue
grow
th.
Whi
lem
ostR
BSU
sar
efo
und
edby
pure
tech
nica
lfou
ndin
gte
ams,
R&
Dex
peri
ence
has
noef
fect
ongr
owth
.Fou
ndin
gte
ams
wit
hco
mm
erci
alex
peri
ence
,on
the
othe
rha
nd,
grow
sign
ifica
ntly
mor
ein
empl
oyee
s,re
venu
es,a
ndto
tala
sset
s.R
BSU
s,w
hich
are
inte
rnat
iona
llyor
ient
edfr
omth
est
art,
grow
sign
ifica
ntly
fast
erin
term
sof
reve
nues
and
tota
lass
ets
butn
otin
empl
oyee
s.Fi
rms
that
are
clos
erto
am
arke
t-re
ady
prod
ucta
tfo
und
ing
do
notg
row
sign
ifica
ntly
mor
ein
term
sof
reve
nues
and
empl
oyee
s,bu
tfirm
sth
atar
eea
rlie
rin
the
prod
uctd
evel
opm
ent
cycl
egr
owm
ore
into
tala
sset
sd
urin
gth
eea
rly
grow
thpa
th.
416
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Geo
rge
etal
.(2
005)
889
Swed
ish
SME
s,w
ith
dat
afr
om19
97to
2000
Stat
isti
csSw
eden
(the
Bur
eau
ofC
ensu
s)H
eckm
anco
rrel
atio
nm
odel
,hie
rarc
hica
lO
LS
regr
essi
onan
dne
gati
vebi
nom
ial
regr
essi
onm
odel
s.
Inte
rnal
owne
rs(C
EO
san
dot
her
seni
orex
ecut
ives
)ten
dto
beri
skav
erse
and
have
alo
wer
proc
livit
yto
incr
ease
scal
ean
dsc
ope
ofin
tern
atio
naliz
atio
nth
anex
tern
alow
ners
(ven
ture
capi
talis
tsan
din
stit
utio
nal
inve
stor
s).
Zah
raet
al.
(200
7)38
4SM
Es
repr
esen
ting
23d
iffe
rent
ind
ustr
ies,
each
wit
h50
0or
few
erfu
ll-ti
me
empl
oyee
s
Surv
eym
etho
dol
ogy,
com
plem
ente
dw
ith
info
rmat
ion
gath
ered
from
seco
ndar
yso
urce
s(S
ME
s’w
ebsi
tes,
new
slet
ters
,and
publ
icat
ions
)
Mod
erat
edre
gres
sion
anal
ysis
Top
man
agem
entt
eam
(TM
T)o
wne
rshi
pis
stro
ngly
and
posi
tive
lyas
soci
ated
wit
hSM
Es’
inve
stm
enti
nbu
ildin
gth
ekn
owle
dge
-bas
edre
sour
ces
dev
oted
toin
tern
atio
naliz
atio
n.A
posi
tive
rela
tion
ship
exis
tsbe
twee
now
ners
hip
byV
Cs
and
SME
s’in
vest
men
tsin
build
ing
two
type
sof
know
led
ge-b
ased
reso
urce
s:hu
man
capi
tala
ndpr
opri
etar
y.O
utsi
de
dir
ecto
rsse
rvin
gon
SME
s’bo
ard
sfu
lfill
ava
luab
leen
terp
rise
role
inth
ego
vern
ance
ofth
ese
firm
sby
offe
ring
new
pers
pect
ives
and
idea
s,an
dfo
cusi
ngm
anag
ers’
atte
ntio
non
the
impo
rtan
ceof
build
ing
know
led
ge-b
ased
reso
urce
s.L
ocke
ttet
al.
(200
8)34
0E
urop
ean
VC
-bac
ked
inve
stm
ents
Que
stio
nnai
res
targ
eted
atse
nior
man
agem
ento
fthe
VC
-bac
ked
firm
s,E
VC
A,
Eur
ope
Unl
imit
edan
dC
MB
OR
dat
abas
es,
ON
ESO
UR
CE
,ex
port
-int
ensi
tyon
line
dat
abas
eE
VC
Ad
irec
tori
es
Hec
kman
Sele
ctio
nes
tim
ates
Ext
erna
lVC
valu
e-ad
ded
reso
urce
sha
vea
grea
ter
impa
cton
expo
rtin
tens
ity
for
earl
y-st
age
vent
ures
than
late
-sta
geve
ntur
es.
Ext
erna
lVC
mon
itor
ing
reso
urce
sha
vea
sign
ifica
ntef
fect
for
late
-sta
geM
BO
/Ifi
rms;
how
ever
,no
sign
ifica
ntef
fect
exis
tsfo
rea
rly-
stag
efi
rms.
(Con
tinu
ed)
417
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Ler
ner
etal
.(2
007)
838
fund
sra
ised
betw
een
1991
and
1998
wit
h46
18in
vest
men
tsby
352
LPs
inth
ese
fund
s
Ass
etA
lter
nati
ves
fund
dat
abas
e(i
nclu
ded
aspa
rtof
thei
rG
alan
te’s
Ven
ture
Cap
ital
and
Priv
ate
Equ
ity
Dir
ecto
ry),
supp
lem
ente
dfr
omV
entu
reE
cono
mic
s’on
line
fund
dat
abas
e,Pr
ivat
eE
quit
yIn
telli
genc
e’s
2004
Priv
ate
Equ
ity
Mon
itor
,Ann
ual
repo
rts
tow
ritt
enre
ques
tfo
rms
mai
led
dir
ectl
yto
the
inve
stor
s,co
nfid
enti
allis
ting
ofin
vest
men
tsby
priv
ate
inve
stor
s,w
ith
who
mth
eau
thor
sha
vepe
rson
alre
lati
onsh
ips.
Pool
edre
gres
sion
,H
ecki
tsam
ple
sele
ctio
nre
gres
sion
and
prob
itre
gres
sion
mod
els
End
owm
ents
(and
toa
less
erex
tent
,pub
licpe
nsio
ns)a
rebe
tter
than
othe
rin
vest
ors
atpr
edic
ting
whe
ther
follo
w-o
nfu
nds
will
have
high
retu
rns.
Jone
san
dR
hod
es-
Kro
pf(2
003)
1245
U.S
.ven
ture
capi
tala
ndpr
ivat
eeq
uity
fund
s,fo
rmed
betw
een
1980
to19
99,w
ith
atle
ast$
5m
illio
nof
com
mit
ted
capi
tal.
The
sefu
nds
excl
ude
mez
zani
nean
dfu
nds-
of-f
und
s
Tho
mso
nve
ntur
eE
cono
mic
sTi
me-
seri
esre
gres
sion
anal
ysis
VC
inve
stm
ents
have
posi
tive
alph
asw
hile
inve
stor
sin
VC
fund
sea
rnze
roal
pha.
Eve
nth
ough
fund
inve
stor
sex
pect
zero
alph
as,
fund
sth
atha
vem
ore
idio
sync
rati
cri
skex
post
will
earn
high
erre
turn
s.
418
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Gom
pers
and
Ler
ner
(199
9)
4069
prof
essi
onal
U.S
.ven
ture
fina
ncin
gsof
priv
atel
yhe
ldfir
ms
taki
ngpl
ace
betw
een
Janu
ary
1987
and
Dec
embe
r19
95,f
orw
hich
Ven
ture
One
was
able
tod
eter
min
eth
eva
luat
ion
ofth
efi
nanc
ing
roun
d
Ven
ture
One
Hed
onic
regr
essi
onap
proa
ch,e
mpl
oyin
gO
LS
spec
ifica
tion
s,lo
g-lo
gfr
amew
ork,
Hec
kman
sam
ple
sele
ctio
nre
gres
sion
anal
ysis
and
inst
rum
enta
lvar
iabl
ere
gres
sion
anal
ysis
The
impa
ctof
vent
ure
capi
tali
nflow
son
pric
esis
grea
test
inst
ates
wit
hth
em
ostv
entu
reca
pita
lact
ivit
yan
dse
gmen
tsw
ith
the
grea
test
grow
thin
vent
ure
infl
ows.
Cha
nges
inva
luat
ion
do
nota
ppea
rto
bere
late
dto
the
ulti
mat
esu
cces
sof
the
firm
s.
Gom
pers
etal
.(2
005)
2179
vent
ure
capi
talfi
rms
inve
stin
gin
1635
4po
rtfo
lioco
mpa
nies
,res
ulti
ngin
4255
9un
ique
obse
rvat
ions
ofV
Cfi
rms-
port
folio
com
pany
pair
s.T
hese
inve
stm
ents
wer
em
ade
betw
een
1975
and
1998
.
Tho
mso
nV
entu
reE
cono
mic
s(V
entu
reE
cono
mic
s)R
egre
ssio
n-ba
sed
anal
ysis
Ven
ture
capi
talis
tsw
ith
the
mos
tind
ustr
yex
peri
ence
incr
ease
thei
rin
vest
men
tsth
em
ostw
hen
ind
ustr
yin
vest
men
tact
ivit
yac
cele
rate
s.
Cum
min
gan
dW
alz
(200
7)22
1PE
fund
sm
anag
edby
72PE
man
ager
s,in
clud
ing
5038
obse
rvat
ions
ofPo
rtfo
liofi
rms
(382
4ar
eV
Can
d12
14la
te-s
tage
mez
zani
nean
dbu
yout
)sp
anni
nga
tim
epe
riod
of33
year
s(1
971–
2003
)d
ispe
rsed
over
39co
untr
ies
from
Nor
than
dSo
uth
Am
eric
ato
Eur
ope
and
Asi
a.T
heob
serv
atio
nsre
pres
ent2
419
fully
real
ized
inve
stm
ents
,166
5un
real
ized
inve
stm
ents
,an
d95
4pa
rtia
llyre
aliz
edin
vest
men
ts.
Dat
aset
colle
cted
byC
ente
rof
Priv
ate
Equ
ity
Res
earc
h(C
EPR
ES)
inFr
ankf
urt,
Ger
man
y
Mul
tiva
riat
ean
alys
isof
IRR
perf
orm
ance
base
dup
onpr
evio
usw
ork
(Coc
hran
e20
05;
Nik
oske
lain
enan
dW
righ
t200
7),
mul
tist
epH
eckm
an-l
ike
sam
ple
sele
ctio
nco
rrec
tion
on real
ized
/un
real
ized
exit
san
dfu
ll/pa
rtia
lex
its
Les
sex
peri
ence
dPE
man
ager
sas
wel
las
thos
ein
volv
edin
earl
y-st
age
inve
stm
ents
are
mor
ein
clin
edto
over
valu
e.Sy
ndic
atio
npr
oves
tolo
wer
the
ince
ntiv
esof
PEfu
nds
toov
erst
ate
the
valu
eof
unre
aliz
edin
vest
men
ts.
Rob
ustn
ess
and
impa
ctof
acco
unti
ngst
and
ard
san
dle
galf
ram
ewor
kar
ene
gati
vely
rela
ted
toth
ere
port
ing
beha
viou
rof
PEm
anag
ers.
(Con
tinu
ed)
419
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Zar
utsk
ie(2
008)
318
first
-tim
eU
.S.b
ased
VC
fund
s,w
hich
are
clas
sifie
das
“Pri
vate
Equ
ity
Firm
sIn
vest
ing
Ow
nC
apit
al.”
The
sefu
nds
wer
era
ised
betw
een
1980
and
1998
.T
hese
fund
sha
veno
nmis
sing
size
info
rmat
ion
and
have
inve
sted
infiv
eor
mor
epo
rtfo
lioco
mpa
nies
.
Ven
ture
Xpe
rtan
dha
nd-c
olle
cted
dat
aset
des
crib
ing
the
wor
k/ed
ucat
iona
lhis
tori
esof
the
vent
ure
capi
talis
tsm
anag
ing
the
VC
firm
sse
lect
edfr
omV
entu
reX
pert
Reg
ress
ion
anal
ysis
Fund
man
agem
entt
eam
sw
ith
mor
eta
sk-s
peci
fic
hum
anca
pita
lman
age
fund
sw
ith
grea
ter
frac
tion
sof
port
folio
com
pany
exit
s.Fu
ndm
anag
emen
ttea
ms
wit
hm
ore
ind
ustr
y-sp
ecifi
chu
man
capi
talm
anag
efu
nds
wit
hgr
eate
rfr
acti
ons
ofpo
rtfo
lioco
mpa
nyex
its.
Fund
man
agem
entt
eam
sth
atha
vem
ore
gene
ralh
uman
capi
tali
nbu
sine
ssad
min
istr
atio
nm
anag
efu
nds
wit
hlo
wer
frac
tion
sof
port
folio
com
pany
exit
s.
Dim
ovan
dSh
ephe
rd(2
005)
112
ind
epen
den
tven
ture
capi
talfi
rms
inth
eU
.S.t
hat
have
mad
eat
leas
tone
inve
stm
enti
nth
ew
irel
ess
com
mun
icat
ion
ind
ustr
y.
Ven
ture
Xpe
rtH
iera
rchi
calr
egre
ssio
nan
alys
isan
dca
noni
calc
orre
lati
onan
alys
isar
eus
edto
anal
yse
the
dat
a.
Gen
eral
hum
anca
pita
lhad
apo
siti
veas
soci
atio
nw
ith
the
prop
orti
onof
port
folio
com
pani
esth
atw
entp
ublic
(IPO
),w
here
assp
ecifi
chu
man
capi
tald
idno
t.H
owev
er,
spec
ific
hum
anca
pita
lwas
nega
tive
lyas
soci
ated
wit
hth
epr
opor
tion
ofpo
rtfo
lioco
mpa
nies
that
wen
tban
krup
t.B
otta
zi,D
aR
in,a
ndH
ellm
ann
(200
8)
119
vent
ure
capi
talfi
rms
from
17co
untr
ies,
wit
h50
3ve
ntur
epa
rtne
rsan
d16
52po
rtfo
lioco
mpa
nies
.The
vent
ure
firm
sar
ein
clud
edw
ere
full
tim
em
embe
rsof
Eur
opea
nV
entu
reC
apit
alA
ssoc
iati
on(E
VC
A)o
rof
ana
tion
alve
ntur
eca
pita
lor
gani
sati
onin
2001
,ac
tive
lyen
gage
din
vent
ure
capi
tal,
and
oper
atio
nali
n20
02.
Surv
eyco
nduc
ted
betw
een
Febr
uary
2002
and
Nov
embe
r20
03,
com
mer
cial
lyav
aila
ble
dat
abas
es,A
mad
eus,
Wor
ldsc
ope
and
Ven
turE
xper
t,an
dtr
ade
publ
icat
ions
like
dir
ecto
ries
ofve
ntur
eca
pita
las
soci
atio
nsan
dw
ebsi
tes
ofth
ere
spon
den
tsan
dth
eir
port
folio
com
pani
es.
Uni
vari
ate
nonp
aram
etri
cte
sts
and
mul
tiva
riat
ere
gres
sion
anal
ysis
incl
udin
g:pr
obit
mod
els,
cond
itio
nal
logi
tmod
els,
IV-C
um-M
ills
mod
el,
inst
rum
enta
lvar
iabl
ere
gres
sion
,So
rens
en-H
eckm
anm
odel
,and
Ack
enbe
rg-B
otti
cni
mod
el.
Prio
rbu
sine
ssex
peri
ence
isan
impo
rtan
tpr
edic
tor
ofin
vest
orac
tivi
sm.T
here
exis
tsa
posi
tive
rela
tion
ship
betw
een
inve
stor
acti
vism
and
the
succ
ess
ofth
epo
rtfo
lioco
mpa
nies
,em
phas
izin
gth
eec
onom
icim
port
ance
ofhu
man
capi
talf
orfi
nanc
ial
inte
rmed
iati
on.
420
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Wri
ghta
ndL
ocke
tt(2
003)
Sam
ple
1an
dSa
mpl
e2
cons
iste
dof
58an
d56
vent
ure
capi
talfi
rms
inth
eU
K,r
espe
ctiv
ely.
Mai
lque
stio
nnai
res
toth
ere
pres
enta
tive
sof
the
vent
ure
capi
talfi
rms
liste
din
the
BV
CA
dir
ecto
ries
of19
98–9
9an
d19
99–2
000
for
Sam
ple
1an
dSa
mpl
e2,
resp
ecti
vely
.
Man
n-W
hitn
eyno
n-pa
ram
etri
cte
sts
stat
isti
cs.
Rep
utat
ion
ishi
ghly
impo
rtan
tin
enco
urag
ing
othe
rpa
rtie
sto
cont
inue
tosy
ndic
ate
wit
ha
vent
ure
capi
talfi
rmbo
thfo
rfu
rthe
rin
vest
men
trou
nds
ofa
part
icul
ard
eala
ndfo
rsu
bseq
uent
dea
ls.T
hefi
nanc
e/ri
sk-s
hari
ngm
otiv
atio
nfo
rsy
ndic
atio
nis
stro
nger
than
the
reso
urce
-bas
edar
gum
ent.
De
Cle
rqan
dD
imov
(200
8)
200
rand
omly
sele
cted
U.S
.-bas
edin
dep
end
ent
foca
lven
ture
capi
talfi
rms,
wit
h14
,129
init
ial
inve
stm
ents
ofw
hich
8,16
2w
ere
firs
t-ro
und
inve
stm
ents
.The
seve
ntur
eca
pita
linv
estm
ents
wer
em
ade
from
1962
to20
02.
Ven
ture
Xpe
rtO
rder
edlo
git
Inve
stin
gin
ind
ustr
ies
inw
hich
the
vent
ure
capi
talfi
rmha
sm
ore
know
led
geor
inve
stin
gw
ith
mor
eor
fam
iliar
part
ners
enha
nces
perf
orm
ance
.Acc
ess
toex
tern
alkn
owle
dge
ism
ore
effe
ctiv
ew
hen
anin
cong
ruit
yex
ists
betw
een
wha
tthe
firm
know
san
dw
hati
tin
tend
sto
know
.
Hoc
hber
g,L
jung
qvis
t,an
dYa
ng(2
007)
3,46
9ve
ntur
eca
pita
lfun
ds
man
aged
by19
74ve
ntur
eca
pita
lfirm
sth
atpa
rtic
ipat
ed,i
n47
,705
inve
stm
entr
ound
sin
volv
ing
16,3
15po
rtfo
lioco
mpa
nies
.The
sam
ple
cons
ider
sal
linv
estm
ents
mad
eby
vent
ure
capi
tal
fund
sra
ised
betw
een
1980
and
1999
,con
cent
rati
ngso
lely
onin
vest
men
tsby
U.S
.bas
edve
ntur
eca
pita
lfu
nds,
excl
udin
gth
ose
mad
eby
ange
lsan
dbu
yout
fund
s.
Tho
mso
nFi
nanc
ial’s
Ven
ture
Eco
nom
ics
dat
abas
eG
raph
theo
ryan
dm
ulti
vari
ate
regr
essi
onan
alys
is
Bet
ter
netw
orke
dve
ntur
eca
pita
lfirm
sex
peri
ence
sign
ifica
ntly
bett
erfu
ndpe
rfor
man
ce.S
imila
rly,
port
folio
com
pani
esof
bett
erne
twor
ked
vent
ure
capi
talfi
rms
are
sign
ifica
ntly
mor
elik
ely
tosu
rviv
eto
subs
eque
ntfi
nanc
ing
and
even
tual
exit
.
(Con
tinu
ed)
421
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Exh
ibit
19.1
(Con
tinu
ed)
Au
:Mis
sin
gw
ord
Au
thor
Sam
ple
Des
crip
tion
Dat
aS
ourc
eM
eth
odof
An
alys
isS
um
mar
yof
Fin
din
gs
Heg
eet
al.
(200
4)Sa
mpl
e1
cons
iste
dof
171
VC
firm
s,67
from
U.S
.and
104
from
6co
untr
ies
inE
urop
e.Sa
mpl
e2
com
pris
es27
4ob
serv
atio
nsfr
omth
eE
U—
15co
untr
ies
and
234
obse
rvat
ions
from
the
U.S
.of
port
folio
com
pani
esth
atha
veat
leas
tone
valu
atio
nob
serv
atio
nin
the
Ven
ture
Xpe
rtan
dof
whi
chth
ere
isa
fina
ncin
gro
und
roun
dd
efine
das
“see
d”
or“e
arly
-sta
ge”
fund
ing.
Que
stio
nnai
resu
rvey
and
dat
ad
eriv
edfr
omth
eT
hom
son
Fina
ncia
l’sV
entu
reX
pert
dat
abas
e
Tobi
treg
ress
ion
and
OL
Sre
gres
sion
tech
niqu
es
U.S
.VC
firm
ssh
owa
sign
ifica
ntly
high
erpe
rfor
man
ceon
aver
age
than
thei
rE
urop
ean
coun
terp
arts
,bot
hin
term
sof
exit
and
rate
ofre
turn
.U.S
.ven
ture
capi
talis
tsm
ore
ofte
nas
sert
cont
inge
ntco
ntro
lrig
hts,
ind
icat
edby
conv
erti
ble
and
dec
isio
nsto
repl
ace
entr
epre
neur
san
dha
vebe
tter
capa
city
tosc
reen
proj
ects
and
ensu
reth
eir
succ
ess
inth
eea
rly
stag
es,t
han
Eur
opea
nve
ntur
eca
pita
lists
.
Ler
ner
and
Scho
ar(2
005)
210
tran
sact
ions
from
28pr
ivat
eeq
uity
grou
psoc
curr
ing
betw
een
1987
and
2003
,wit
hth
ebu
lkof
inve
stm
ents
betw
een
1996
and
2002
.The
tran
sact
ions
repr
esen
t30
dis
tinc
tco
untr
ies.
Surv
eyin
the
priv
ate
equi
tygr
oups
that
inve
stin
dev
elop
ing
nati
ons
Mul
tiva
riat
ere
gres
sion
Inve
stm
ents
inna
tion
sw
ith
effe
ctiv
ele
gal
enfo
rcem
enta
rem
ore
likel
yto
empl
oypr
efer
red
stoc
kan
dto
have
mor
eco
ntra
ctua
lpr
otec
tion
sfo
rth
epr
ivat
eeq
uity
grou
p,su
chas
supe
rmaj
orit
yvo
ting
righ
tsan
dan
tid
iluti
onpr
ovis
ions
.
Kap
lan
and
Stro
mbe
rg(2
009)
17,1
71pr
ivat
e-eq
uity
spon
sore
dbu
yout
tran
sact
ions
,whi
choc
curr
edbe
twee
nJa
nuar
y1,
1970
,and
June
30,2
007.
The
tran
sact
ions
that
had
been
anno
unce
dbu
tnot
com
plet
edby
Nov
embe
r30
,200
7ar
eex
clud
ed.
Cap
ital
IQd
atab
ase
Tren
dan
alys
isan
dre
gres
sion
anal
ysis
On
aver
age,
priv
ate
equi
tycr
eate
sec
onom
icva
lue
and
ther
efor
e,ha
sa
subs
tant
ial
perm
anen
tcom
pone
nt.P
riva
teeq
uity
acti
vity
issu
bjec
tto
boom
and
bust
cycl
es,d
rive
nby
rece
ntre
turn
sas
wel
las
leve
lofi
nter
estr
ates
rela
tive
toea
rnin
gsan
dst
ock
mar
ketv
alue
s,pa
rtic
ular
lyfo
rla
rger
publ
ic-t
o-pr
ivat
etr
ansa
ctio
ns.
422
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
Wri
ghte
tal.
(200
4)35
7ve
ntur
eca
pita
lfirm
sfr
om9
coun
trie
sin
Eur
ope,
U.S
.an
dA
sia;
cove
ring
ara
nge
ofd
iffe
rent
lega
lsys
tem
s
Mul
tico
untr
yd
ata
colle
cted
thro
ugh
mai
ling
ques
tion
nair
esan
dco
nduc
ting
face
-to-
face
orte
leph
one
inte
rvie
ws
Kru
skal
-Wal
liste
stan
dm
ulti
vari
ate
anal
ysis
usin
gO
LS
regr
essi
on.
VC
firm
sin
Eur
ope
and
Asi
aar
esi
gnifi
cant
lyle
sslik
ely
than
U.S
.VC
firm
sto
use
liqui
dat
ion
valu
em
etho
ds
butm
ore
likel
yto
use
PEco
mpa
rato
rs.E
urop
ean
firm
sar
esi
gnifi
cant
lyle
sslik
ely
toad
optD
CF
met
hod
sco
mpa
red
toU
.S.V
Cfi
rms.
VC
firm
sop
erat
ing
und
erG
erm
anle
gals
yste
mar
ele
sslik
ely
tout
ilize
info
rmat
ion
from
fina
ncia
lpr
ess
buts
igni
fica
ntly
mor
elik
ely
tous
ein
terv
iew
sw
ith
entr
epre
neur
s.V
Cfi
rms
oper
atin
gun
der
Fren
chle
gals
yste
mar
em
ore
likel
yto
utili
sein
terv
iew
sw
ith
com
pany
pers
onne
las
wel
las
sale
san
dm
arke
ting
info
rmat
ion.
VC
firm
sin
Eur
ope
and
Asi
aar
esi
gnifi
cant
lym
ore
likel
yth
anU
.S.V
Cfi
rms
tous
efi
nanc
ialp
ress
.VC
firm
sin
Asi
aar
esi
gnifi
cant
lyle
sslik
ely
tom
ake
use
ofin
terv
iew
sw
ith
entr
epre
neur
sor
busi
ness
plan
dat
a.V
Cfi
rms
inE
urop
ear
esi
gnifi
cant
lym
ore
likel
yto
utili
zesa
les
and
mar
keti
ngin
form
atio
n.W
righ
t,Pr
uthi
and
Loc
kett
(200
5)
NA
NA
Lit
erat
ure
revi
ewof
inte
rnat
iona
lven
ture
capi
tals
tud
ies
Und
er-r
esea
rche
dar
eas
conc
ern
the
infl
uenc
eof
inst
itut
iona
lcon
text
,esp
ecia
llyth
ero
leof
soci
alne
twor
ksan
dcu
ltur
es.T
here
exis
tsm
ajor
rese
arch
gap
inre
lati
onto
wor
kd
ealin
gw
ith
cros
sing
ofco
untr
ybo
rder
sby
vent
ure
capi
talfi
rms.
423
-
P1: OTA/XYZ P2: ABCc19 JWBT218-Cumming December 11, 2009 21:46
Printer Name: Hamilton
424 Venture Capital Exits and Returns
in capital growth. During the investment phase, the management
fee will typicallybe 1.5 to 2.0 percent of the committed fund
size.
The management fee was originally intended to pay for the
operating costs ofemploying staff and other expenses associated
with the fund manager’s business,plus the reasonable salaries of
the partners. Any excess over these costs is retainedby the
management company and may be paid to its partners/shareholders.
Fundmanagers have to balance the use of fee income to reinvest in
growing the person-nel, infrastructure, and assets of the business
with the requirement to recruit andretain their best partners by
offering industry-competitive remuneration.
The share of capital profits (“carried interest” or “carry”) is
shared among thefund managers and their staff according to whatever
arrangement they have agreedamong themselves and their limited
partners. The share is typically 20 percentonce the investors have
received an agreed minimum hurdle rate return (currentlyaround 8
percent, but variable from fund to fund), less fees received.
Gompers andLerner (1999) find from a study of over 400 VC funds in
the United States that thefixed element of compensation is higher
for funds that are smaller, younger, andfocused on early-stage and
high tech deals. Over four-fifths of funds had a carryin the range
20 to 21 percent.
In addition to these fees and profit share that are common to
most funds, otherfees may be receivable by the fund managers.
Monitoring and/or non-executivefees are widely payable by
individual investee companies to defray some of thecosts of
employees and partners of PE managers monitoring the investment.
Thesefees may be payable to the PE fund or to the manager, or split
between them in apredetermined proportion. They
