Private captive fund providers and the likelihood of achieving successful venture capital exits

Abstract

We analyze the impact of the relationship between private captive venture capital firms (VCFs) and their parent investors on the likelihood of achieving successful exits in investee firms. We argue that the differences in strategic goals and the way venture managers are appointed and incentivized may affect the exit way achieved by different types of captive VCFs. In particular, we focus on private captive VCFs solely funded by a corporation or a financial institution, as well as on semi-captive VCFs jointly funded by several entities. We find that captive VCFs backed by corporations show a higher likelihood of exiting their portfolio firms more successfully than those backed by financial institutions and semi-captive VCFs. VCFs backed by corporations seem to have strategic goals that are compatible with the maximization of portfolio return, and their venture managers may contribute with valuable specific industry knowledge. Conversely, the managers of VCFs wholly owned by financial institutions rarely contribute with industry and technology knowledge and are even more affected by the lack of adequate compensation packages.