Abstract
We analyze the lifecycle dynamics of venture capital (VC) funds and find that the outcomes of portfolio companies vary over a fund’s lifespan. Investments made earlier in a fund’s life are more likely to achieve successful exits through IPOs and M&As. We attribute this pattern to three key channels: the financing channel, which reflects the deeper in-the-money option for follow-on investments available in younger funds; the monitoring channel, which captures the extended non-financial support these funds provide; and the selection channel, which suggests that higher-quality entrepreneurs prefer younger funds due to the added value of financing and monitoring. First, we present empirical evidence to establish these channels. Next, we develop a theoretical model to formalize the underlying mechanisms and validate founder preferences through a survey of investors and entrepreneurs.
Keywords: Fund Age, Fund Lifecycle, Entrepreneurial Selection, Startup-VC Matching,
Financial Frictions, Exits, M&As, IPOs, Board, Serial Entrepreneurs