Venture capital and career concerns

This dissertation examines the effect of career concerns on the pattern of investments selected by venture capital fund managers. I propose a simple model in which managers strategically adjust the variance of their portfolio to maximize the probability of raising a follow-on fund. The model demonstrates that career concerns can encourage venture capital fund managers to inefficiently select investments that are too conservative. The influence of these career incentives declines following good initial fund performance, leading to a positive correlation between early fund performance and late fund risk-taking. Using a unique data set of company-level cash flows from 181 venture capital funds, I demonstrate that the intra-fund patterns of investment in venture capital broadly match the predictions of the model. First, I show that the characteristics of career concerns in the venture capital industry are consistent with the assumptions which drive the model. Funds who perform well in their initial investments raise a new fund more quickly, and the size of their next fund is concave with respect to the existing fund's performance. Second, using a maximum likelihood methodology I show that venture capital fund managers select more risky portfolio companies following good performance and tend to be less diversified.