Venture capitalists provide value for investors seeking to make allocations to early-stage or emerging firms, according to research from Rustam Abuzov, a PhD candidate at the Swiss Finance Institute and University of Lausanne.
“There is a recent movement of pension funds to do direct investments into venture capital, getting rid of the middle man like venture capitalists. And my results are in favour of venture capitalists having real skills in the company selection,” says Abuzov.
When venture capitalists are distracted when investing in new portfolio companies there is evidence that performance suffers, his research found. Companies they invest in during periods of distraction end up being seven per cent less likely to go public or get acquired and they also exhibit lower exit multiples, the research found. “This indirectly means there is a skill in the company selection process because otherwise I wouldn’t find anything with these results,” says Abuzov.
In a venture context, whether a venture capitalist is actually adding value an institutional investor wouldn’t otherwise get is of major importance, the paper noted. However, since it is so difficult to measure how much research and effort venture capitalists put into their investment decisions, their actual skill is hard to factor into analysis, it said.
One thing that can be measured, however, are moments when venture capitalists would logically become distracted, such as when a company they are invested in makes an initial public offering, the paper found. The time leading up to, and shortly after the IPO, is an identifiable moment when a venture capitalist’s attention is diverted, making it harder for them to perform their primary function, which is to research and identify new opportunities.
“This finding indirectly hints to the presence of skill in venture capitalists’ ability to source and screen investment opportunities,” the paper said.