Investment into venture capital funds in Europe: An exploratory study

Abstract

Insight into the flow of capital into venture capital (VC) funds is fundamental to our understanding of the overall flow of capital into entrepreneurial ventures. To understand the processes and criteria utilized by limited partners (LPs) in the selection of the VC funds in which they invest we studied 21 European fund-of-fund investment management firms that actively invest in VC funds. We have demonstrated that such LPs utilize structured selection processes and criteria that are comparable to those used by VCs themselves, but with important differences. Notably, we found that LPs build early consensus within the investment team via a stage we have termed ratification. In selecting VCs, quantitative measures of reputation via historical performance are important, consistent with previous findings, but we found that reputation also captures opinions from entrepreneurs, other LPs and other VCs. We found that nurturing informal relationships outside the formal limited partnership agreement is an important component of LPs' decisions to invest and that LPs may pre-allocate capital to VCs with whom a relationship exists already. We conclude that early relationship building with potential LPs is an essential prerequisite for VCs aiming to raise a first fund.

New Zealand venture capital funds and access to new financing: an exploratory study

“…A historical record of producing returns is required to create a "track record", which illustrates the competence and quality of a fund manager to potential investors. The importance placed on "track record" as a quality indicator is consistent with prior studies that show investors use the historical track record of returns as the primary measure of reputation and a predictor of future fund manager performance (Barnes and Menzies, 2005;Fried and Hisrich, 1989).…”

“…Once investors decide to allocate a portion of their portfolio to VC investment, a second level of decision-making then follows that involves a structured process where prospective VC funds are identified, screened, evaluated and selected for investment (Barnes and Menzies, 2005). The four key criteria [12] of importance that were reported during the evaluation and selection stage were:…”

The First Step of the Capital Flow from Institutions to Entrepreneurs: the Criteria for Sorting Venture Capital Funds

“…They detect five general criteria for the selection of GPs: people, teamwork, prior performance, discipline, and strategy. Barnes and Menzies (2005) also address the LPs' allocation criteria by interviewing 21 players. They find that LPs follow clear procedures when (annually) allocating their VC exposure.…”

Determinants for allocations to Central Eastern Europe venture capital and private equity limited partnerships

“…Fried and Hisrich (1989) detect five general criteria for the selection of GPs: people, teamwork, prior performance, discipline and strategy. Barnes and Menzies (2005) find that LPs follow clear procedures when they allocate their VC exposure. The goal is to determine a GP's reputation, and this is used as a proxy for future performance.…”