Abstract

Insight into the flow of capital into venture capital (VC) funds is fundamental to our understanding of the overall flow of capital into entrepreneurial ventures. To understand the processes and criteria utilized by limited partners (LPs) in the selection of the VC funds in which they invest we studied 21 European fund-of-fund investment management firms that actively invest in VC funds. We have demonstrated that such LPs utilize structured selection processes and criteria that are comparable to those used by VCs themselves, but with important differences. Notably, we found that LPs build early consensus within the investment team via a stage we have termed ratification. In selecting VCs, quantitative measures of reputation via historical performance are important, consistent with previous findings, but we found that reputation also captures opinions from entrepreneurs, other LPs and other VCs. We found that nurturing informal relationships outside the formal limited partnership agreement is an important component of LPs' decisions to invest and that LPs may pre-allocate capital to VCs with whom a relationship exists already. We conclude that early relationship building with potential LPs is an essential prerequisite for VCs aiming to raise a first fund.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.