What is it about?
The proportion of all projects that venture capitalists are able to sell to other investors within private or public equity markets is referred to as the "exit rate". Exit rates have been utilized as measures of venture capitalists' fund performance. This study develops a theoretical model that enables the disaggregation of exit rates into ability and risk components.
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Why is it important?
While the ability component of exit rates exhibits certain regularity properties that render it a good predictor of future fund performance, the risk component of exit rates is not as well behaved. In so far as predictability of future fund performance is concerned, the utilization of the ability component has superior forecast power in relation to the gross (non disaggregated) value or the risk component of exit rates.
Perspectives
This paper generates predictability that arguably is superior to actual outcomes and that can be shown to be robust. This finding indicates venture capitalists themselves do not have accurate estimates of the contributions of ability and risk to aggregate fund performance. These findings imply models that enable the disaggregation of fund performance into ability and risk components are beneficial to both venture capitalists and investors.
Dr Oghenovo A Obrimah
Fisk University
Read the Original
This page is a summary of: Disaggregating Exit Success Rates into Ability and Risk Components, SSRN Electronic Journal, January 2014, Elsevier,
DOI: 10.2139/ssrn.2503294.
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