The “Have Nots” and “Have Lots” in the U.S. Venture Capital Industry

Abstract

The Dodd–Frank Act has made it mandatory for all U.S. venture capital funds (VCs) with assets under management (AuM) exceeding $150 million to register with the U.S. Securities and Exchange Commission (SEC). We ask what the optimal threshold size for registration is and find that the distribution of capital managed by VCs in the U.S. closely follows a Pareto distribution. We try to explain why. We demonstrate theoretically that this can happen only if the shape of the VCs’ return distribution is indistinguishable. We prove that heterogeneous return distributions among VCs would lead to a non-Pareto distribution. We do a cost-benefit analysis of regulations and arrive at an optimal threshold of $250 million, which means that a regulator could oversee 79% fewer VCs. The VCs with AuM between $150 million and $250 million are only 17% of total industry AuM. Supervising too large a number of VCs may spread regulatory resources too thin and dilute the effectiveness of supervision. Keeping the size threshold at $250 million would allow a regulator to optimize monitoring time and effort. <b>TOPICS:</b>Private equity, legal/regulatory/public policy, statistical methods