Essays in Venture Capital and Predictability

Strategic Decertification in Venture Capital : Early round VC syndicates can strategically threaten not to participate in a follow-on round of  financing. Non-pursued certification would send a negative signal to alternative syndicates. This reduces the value of the entrepreneur's reservation strategy. In competitive early rounds, syndicates with highest expertise are the most threatening. They cannot fully precommit against exercising their strategic decertification option and become unattractive to entrepreneurs. Forming syndicates which are heterogeneous in expertise levels, is the most efficient way to precommit against strategic decertification. A large scale empirical analysis of VC investments finds that syndicates start out with higher levels of heterogeneity in early rounds and tend towards homogeneity in later rounds. This is inconsistent with previous theories of syndicate formation but consistent with strategic decertification.

Predicting Stock Returns in the presence of Uncertain Structural Changes and Sample Noise: The predictive power of the dividend price ratio (among other predictors) has been under intensive scrutiny. Most studies on return predictability assume predictor variables follow stationary processes with constant long run means. In view of the apparent evidence of structural breaks in the dividend-price ratio mean we propose an estimation method to extract its persistent current regime mean that explicitly incorporates the uncertainty about the time in which structural breaks occur. We  nd that adjusting for structural changes in the ratio's mean, structural change uncertainty and parameter estimation error, improves the predictive explanatory power of the dividend to price ratio in-sample as well as its out-of-sample forecasting ability to a very significant extent.

Great Expectations: The Evolution of Entrepreneurs' Perceptions of VC Value-Add : To what extent do Venture Capitalists (VCs) fulfill the expectations of the entrepreneurs who receive funding from them? To answer this question, we analyze a hand-collected data set consisting of a random sampling of entrepreneurs who's companies received VC  financing during 1998-2002 and have had the benefit of over eight years of hindsight to reflect upon their experiences. We find that there is strong evidence that VCs tend to consistently disappoint their entrepreneurs. Surprisingly, this result is common across both experienced as well as inexperienced entrepreneurs. Our analysis indicates that the areas where VCs tend to disappoint the most are related to the VC's \value-add". We find that these results are robust to previous startup experience, prior business experience and the education level of the entrepreneur. Since these results are based on responses from the entrepreneurs who presumably know the VCs well, our results challenge the\conventional wisdom" that the negative image of VCs are based on misconceptions.