What Drives Venture Capital Fundraising?

Abstract

IntroductionDuring 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 importance 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 organizations 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 expenditures-as well as firm-specific performance and reputation-affect 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 many 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 venture 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