Partner-Selection Effects on Venture Capital Investment Performance

Abstract

This paper is intended to complement the existing literature on the performance of venture capital (VC) investments by presenting a multiple principal-agency framework for examining partner selection strategies aimed at mitigating uncertainties in the causes of superior investment performance and their boundary conditions. Using a dataset of VC investments from 1980 and 2008 in the U.S., we separated independent VC (IVC) firms and corporate VC (CVC) firms into two different datasets. We found that the existence of industrial and geographic uncertainties was shown to negatively affect the performance of IVC investments. Other things being equal, the preference for IVC firms as partners led to superior performance by CVC firms. However, from the homophily and resource perspectives, if various VC-specific uncertainties are considered to be contextual factors, one would expect CVC firms to be selected as partners by either IVC or CVC firms as a way to increase the probability of investment success.