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1、 1. Introduction During the past twenty years, commitments to the U.S. venture capital industry have grown dramatically. This growth has not been uniform: it has occurred in quite concentrated areas of the country and peaks in fundraising have been followed by major retrenchments. Despite the import
2、ance of the venture capital sector in generating innovation and new jobs, few academic studies have attempted to determine the underlying causes of these dramatic movements in venture fundraising. In this paper we examine the forces that affect fundraising by independent venture capital organization
3、s from 1972 through 1994. We study both industry fundraising patterns and the fundraising success of individual venture organizations. We find that regulatory changes affecting pension funds, capital gains tax rates, overall economic growth, and research and development expendituresas well as firm-s
4、pecific performance and reputationaffect fundraising by venture capital organizations. The results are potentially important for understanding and promoting venture capital investment. Various factors may affect the level of commitments to venture capital organizations. Poterba (1989) argues that ma
5、ny of the changes in fundraising could arise from changes in either the supply of or the demand for venture capital. When we refer to the supply of venture capital, we mean the desire of investors to place money into venture capital funds. Demand is then the desire of entrepreneurs to attract ventur
6、e capital investment in their firm. For example, decreases in capital gains tax rates might increase commitments to venture capital funds through increases in the desire of taxable investors to make new commitments to funds as well as through increases 2 in the demand for venture capital investments
7、 when workers have greater incentives to become entrepreneurs. Our research methodology attempts to distinguish between supply and demand factors that affect the quantity of venture capital. We find that demand-side factors appear to have had an important impact on commitments to venture capital fun
8、ds. Capital gains tax rates have an important effect at both the industry, state-, and firm-specific levels. Decreases in the capital gains tax rates are associated with greater venture capital commitments. The effect, however, appears to occur through the demand for venture capital: rate changes af
9、fect both taxable and tax-exempt investors. Similarly, R Ippolito (1989) indicated that mutual fund managers as a group do not significantly outperform the market, recent work has shown cash flows appear to respond to past performance. Sirri and Tufano (1998) find that performance relative to peers
10、in the same investment category is an important determinant of new capital commitments to mutual funds. They examine 690 equity mutual funds and rank the funds by their performance relative to funds that have the same investment focus. They find that the top performing funds in any particular invest
11、ment style have substantial new commitments to their funds in the subsequent year. The relation between performance and commitments, however, is not linear. Funds that perform poorly do not appear to be penalized in the following year. Money does not leave poor performing funds. Sirri and Tufano (19
12、98) find that one exception to these findings is new funds. Money does seem to leave a new fund if it is a poor performer. Chevalier and Ellison (1997) examine how these patterns affect investment incentive functions. They find that funds which have underperformed their peers in the first part of th
13、e year have an incentive to increase the riskiness of their portfolios in order to increase the chances that they will end up near the top of the performance charts. If they bet wrong and fail, they will lose few of their current investors. If the evidence from mutual funds has implications for vent
14、ure capital, then we would expect that recent performance would be positively related to commitments to new funds. As in Sirri and Tufanos (1998) mutual fund results, reputation of the venture organization may influence the flow of new commitments when it raises a new fund. Several measures of reput
15、ation may be important. These include venture organization age and capital under management. Older and larger 13 venture organizations are likely to have more established reputations. They may therefore receive larger capital commitments than similar younger funds. 4. Venture Industry-Wide Results W
16、e examine the implications of performance and capital gains tax rates for commitments to venture capital funds by performing two layers of analysis: aggregate flows and commitments to individual funds. The first level of analysis examines the flow of venture capital commitments into the industry. We examine the commitments to new venture capital funds from 1969 through 1994 first aggregating all commitments in the U.S. We then take up an analysis of the level of venture activity on a state-by
