Research on Luck in Venture Capital

‘Tis better to be lucky than to be good.

Picking a winning investment early on meant little for the firm’s future success in selecting companies, the analysis found. VC firms that had enjoyed initial success were no better than their mainstream peers at choosing promising industries or regions. Likewise, investors’ abilities to nurture and develop portfolio companies played “little if any” role in long-term performance.

Venture capital firms are, however, better able to access later opportunities when their initial rounds succeed, according to the study, which was published this month by the National Bureau of Economic Research. When limited partners and entrepreneurs believe that a venture capital firm has been successful in making previous investments, they give the firms more access to both capital and deals.

Luck and Reputation Matter in Venture Capital. Skill Doesn’t., Institutional Investor

For those new to venture, you have to ask yourself: are you in the right place at the right time to get your lucky break?

The picture that emerges then is one where initial success gives the firms enjoying it preferential access to deals. Both entrepreneurs and other VC firms want to partner with them. Successful VC firms therefore get to see more deals, particularly in later stages, when it becomes easier to predict which companies might have successful outcomes. Even if venture capitalists do not differ in their abilities to identify more promising ventures (but they all have some ability to distinguish the entrepreneurs and startups with better odds of success), this access advantage could perpetuate differences in initial success over extended periods of time.

The Persistent Effect of Initial Success: Evidence from Venture Capital

Inside the Main Quad at Stanford are time capsules buried underneath each class year.
Photo by Emily Karakis on Unsplash

Post by Marcelino Pantoja