Is a VC Partnership Greater Than the Sum of Its Partners?

by Michael Ewens & Matthew Rhodes-Kropf

Executive Summary — Venture capital investments are an important engine of innovation and economic growth, but extremely risky from an individual investor's point of view. Furthermore, there are large differences in fund performance between top quartile and bottom quartile venture capital funds. The ability to consistently produce top performing investments implies that there is something unique and time-invariant about venture capital firms. But to what extent are the important attributes of performance a part of the firm's organizational capital or embodied in the human capital of the people inside the firm? Michael Ewens and Matthew Rhodes-Kropf find that the partner is extremely important. Additionally, results suggest that venture capital partnerships are not much more than the sum of their partners. Partners are often significantly different from each other, but "good" firms are those with a group of better partners. Thus, firms that have maintained high performance across many funds may have simply been able to retain high quality partners rather than actually provide those partners with much in the way of fundamental help. Key concepts include:

  • Performance seems almost entirely attributable to the partner, and firm characteristics seem to matter little in venture capital investing.
  • The organizational capital inside a venture capital firm is limited. This would imply limited size firms.

Author Abstract

Venture capital firms' ability to repeatedly make top performing investments suggests the importance of some aspect of organizational or human capital. However, it is an unanswered question as to what extent the important attributes of performance are a part of the firm's organizational capital or embodied in the human capital of the people inside the firm. We examine the performance at the partner-investment level to determine the extent of persistence in individual partners' ability to IPO, achieve outsized exits or fail, and to what extent that performance is attributable to the firm or the partner. Shedding light on the sources of performance in venture capital firms will help us make progress on a fundamental question in economics as to whether a firm is more than the sum of its parts.

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