How does specialization affect venture capital and private equity fundraising?
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School of Business | Master's thesis
AbstractIn this master’s thesis, we study the impact of venture capital (VC) and private equity (PE) firm specialization on fundraising. Prior literature in the space has found that firms with better reputation and experience tend to perform better in overall investing and fundraising activities, in addition to favorable macroeconomic conditions having a positive impact as well. However, specialization and its effect on VC and PE fundraising has been covered by only a few papers with relatively inconclusive results. We shed light on the topic in the US in the 21st century. We examine specialization through the lenses of stage, portfolio company business type, industry, and geography – on both firm and fund-levels. Firm-level specialization is measured from the lifetime historical investment track record of a firm, while the novel fund-level specialization measure represents more recent focus by a firm as it is based on the investments of a firm’s preceding fund. Fundraising activity is measured with fundraising speed and fundraising volume, where speed refers to the duration between two sequent funds by a firm, and volume refers to the size of a fund. We aim to contribute to existing literature by utilizing a larger and more recent data sample, introducing a new specialization dimension in the form of portfolio company business type, introducing alternative specialization variables on the fund-level, and by including both VC and PE in the same study to examine the differences between the domains. The data is gathered from VentureXpert, a Securities Data Company (SDC) Platinum proprietary database covering venture capital and private equity firm, fund and portfolio company data globally. VentureXpert provides us a final sample of 4 054 US-based fundraises from 2000 to 2023. We focus on sequent fundraises by the firms to be able to calculate our variables of interest, such as duration and fund-level specialization. 2 452 of the funds were raised by VC firms, while the remaining 1 602 were raised by PEs. To study the relation between specialization and fundraising, we conduct univariate and multivariate analyses. The multivariate analysis is conducted with a standard linear regression model, where we examine the impact of Herfindahl-Hirschman specialization indexes on duration and volume separately, while controlling for various firm-specific and macroeconomic variables. We find consistent evidence that specialization leads to faster fundraising and smaller funds across all dimensions, except geographical specialization. Secondly, the results indicate that recent specialization measured with the fund-level variables explains more of the relation than the firm-level variables. Thirdly, we conclude that specialization is slightly more meaningful in venture capital fundraising than in private equity.
Thesis advisorNyberg, Peter
fundraising, venture capital, private equity, specialization