Revisions in Fund Flows and Market Reputation Estimates within Venture Capital Markets

Abstract

This study finds absolute values of decreases in fund flows to venture capitalists (VCs) increase with prior cycle portfolio performance. This finding indicates decreases in fund flows cannot be construed as evidence of inferior portfolio performance within venture capital markets. In light of empirical evidence that VCs which experience decreases in fund flows constitute significant proportions of universe of VCs, neither of fund sizes nor increases in fund sizes can be regarded as robust proxies for VCs' market reputations. Consistent with inferences, empirical results reject presence of intrinsic ability or prior performance rationales for fund flows that accrue to the class of VCs characterized by largest proportional increases in fund sizes. Empirical results show the market reputation construct proposed in Obrimah (2016a) is robust to decreases in fund flows; that is, show the market reputation construct predicts increase in reputation in contexts within which VCs deliver superior performance, but transition to smaller funds. Simultaneously, the market reputation construct fails to predict increase in reputation in contexts within which increases in fund flows are not explained by intrinsic ability or VCs' prior performance.