Picking great companies is tough. As I watch these students present their varied business ideas, I am reminded that venture capitalists must overcome many informational challenges in selecting investments. My intuition is that venture capitalists would get measurably better at this task through experience. Morten Sorensen of the University of Chicago Graduate School of Business is working to confirm that intuition in a paper entitled How Smart is Smart Money: An Empirical Two-Sided Matching Model of Venture Capital. This is an interesting project, and I wish he had a link to the paper online. He presented the paper today at the University of Wisconsin School of Business, so I will try to describe his project here (without any real prospect of capturing all of the nuance in the paper).
The big question is whether experience matters, and Sorensen hypothesizes that it might matter in two ways. First, experienced venture captialists may add more value than inexperienced venture capitalists. This might happen in varied ways. For example, experienced venture captialists probably have more contacts among potential employees, suppliers, customers, etc. than inexperienced venture capitalists. Sorensen calls this "influence." Second, experienced venture captialists may get access to better deals than inexperienced venture capitalists. Sorensen calls this "sorting." The gist of the paper is that experience matters, both as to influence and sorting. I look forward to seeing a draft of the paper on SSRN.
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1. Posted by Ola Bengtsson on May 15, 2005 @ 16:43 | Permalink
Just read your blog. Morten's paper could be found at
PhD student in Finance, GSB University of Chicago