Luck and Reputation Matter in Venture Capital. Skill Doesn’t.

Harvard and Yale researchers find that VCs’ abilities to pick investments and nurture start-ups “play little role if any” in long-term outperformance.

Illustration by II

Illustration by II

Success tends persist in venture capital, but it has little or nothing to do with investor skill, a new study has found.

Rather, scoring a few early wins — investing in the right companies at the right times — gives VC firms access to better deals, which often leads to long-term outperformance.

And picking those original winners appears to be a matter of luck, according to “The Persistent Effect Of Initial Success: Evidence From Venture Capital,” by researchers Ramana Nanda (Harvard Business School), Sampsa Samila (IESE Business School), and Olav Sorenson (Yale School of Management).

“Our results suggest that the early success of VC firms depends almost entirely on having been ‘in the right place at the right time’ — that is, investing in industries and in regions that did particularly well in a given year,” Nanda, Samila, and Sorenson wrote.

The authors analyzed decades of portfolio investment and performance data to assess the mechanisms of venture capital success. Drawing on VentureXpert’s database, they focused on firms’ initial investments made between 1961 and 2008. The results showed that choosing a previously successful venture capital firm should increase the chances of future outperformance. But not for the reasons one might expect.


Picking a winning investment early on meant little for the firm’s future success in selecting companies, the analysis found. VC firms that had enjoyed initial success were no better than their mainstream peers at choosing promising industries or regions. Likewise, investors’ abilities to nurture and develop portfolio companies played “little if any” role in long-term performance.

Venture capital firms are, however, better able to access later opportunities when their initial rounds succeed, according to the study, which was published this month by the National Bureau of Economic Research. When limited partners and entrepreneurs believe that a venture capital firm has been successful in making previous investments, they give the firms more access to both capital and deals.

“Limited partners have to pay attention to what sets the high performing VCs apart,” Samila told Institutional Investor by phone Monday. “They should pay attention to venture capital firms that have superior deal flow and that are able to win competitive bids.”

“Although these early differences in performance appear to depend on being in the right place at the right time, they become self-reinforcing as entrepreneurs and others interpret them as evidence of differences in quality, giving successful VC firms preferential access to and terms in investments,” the authors wrote.

[II Deep Dive: It’s Getting Easier to Avoid Poor Performance in Venture Capital]

The study showed that when venture capital firms have already performed strongly, they are more likely to gain access to later rounds of funding when a startup is more viable. They are also more likely to access capital from limited partners, and larger pools of capital are another way of gaining access.

“Both entrepreneurs and other VC firms want to partner with them,” the study said. “VC firms, therefore, get to see more deals, particularly in later stages, when it becomes easier to predict which companies might have successful outcomes.”

As Samila put it, “The deals are won not by the highest bidder but by the right reputation.”