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The Venture Capital Initiative brings together faculty, staff, students, and practitioners to advance and promote research and teaching on innovation and venture capital.

Our goal is to advance understanding of venture capital and innovation ecosystem through conducting research, collecting high quality data, and developing teaching methodology. We aim to bring together leading academics and practitioners to help solve the problems that are highly relevant to entrepreneurs, financiers, policymakers, and researchers worldwide.

Stanford Financing of Innovation Summit

As the inaugural event of the Stanford GSB Venture Capital Initiative, the Stanford Financing of Innovation Summit, brought together leading researchers and practitioners to discuss the direction of research in the field of innovation and venture capital and to exchange ideas and share expertise.

Related Insights by Stanford Business

Inside the secret world of venture capital, how economic insecurity affects worker innovation, silicon valley’s unicorns are overvalued, do funders care more about your team, your idea, or your passion, how much does venture capital drive the u.s. economy, shai bernstein: does face time with investors make a startup more successful, past vci events.

As VCI’s inaugural event, the Stanford Financing of Innovation Summit brought together leading researchers and practitioners to discuss the direction of research in the field of innovation and venture capital and to exchange ideas and share expertise.

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Venture Capital: A Catalyst for Innovation and Growth

This article studies the development of the venture capital (VC) industry in the United States and assesses how VC financing affects firm innovation and growth. The results highlight the essential role of VC financing for U.S. innovation and growth and suggest that VC development in other countries could promote their economic growth.

Jeremy Greenwood is a professor of economics at the University of Pennsylvania. Pengfei Han is an assistant professor of finance at Guanghua School of Management at Peking University. Juan M. Sánchez is a vice president and economist at the Federal Reserve Bank St. Louis. We thank Ana Maria Santacreu for helpful comments.

INTRODUCTION

Venture capital (VC) is a particular type of private equity that focuses on investing in young companies with high-growth potential. The companies and products and services VC helped develop are ubiquitous in our daily lives: the Apple iPhone, Google Search, Amazon, Facebook and Twitter, Starbucks, Uber, Tesla electric vehicles, Airbnb, Instacart, and the Moderna COVID-19 vaccine. Although these companies operate in drastically different industries and with dramatically different business models, they share one common and crucial footprint in their corporate histories: All of them received major financing and mentorship support from VC investors in the early stages of their development.

This article outlines the history of VC and characterizes some stylized facts about VC's impact on innovation and growth. In particular, this article empirically evaluates the relationship between VC, firm growth, and innovation.

Read the full article .

Cite this article

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16 research papers every VC should know

Posted by Shaun Gold | October 10, 2022

Understanding venture capital is more than reading decks and tweaking your fund’s investment thesis. It requires an edge that comes from knowledge. Here are thirteen of the best research papers on VC to help you obtain that edge.

1. many of the largest u.s. companies owe a vc.

VC powers the U.S. economy

Will Gornall (University of British Columbia (UBC) - Sauder School of Business) and Ilya A. Strebulaev (Stanford University - Graduate School of Business; National Bureau of Economic Research) showcase that Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies’ R&D spending. Among public companies founded within the last fifty years, VC-backed companies account for half in number, three quarters by value, and more than 92% of R&D spending and patent value. This only transpired after the 1970s ERISA reforms. The paper further shows that US VC industry is causally responsible for the rise of one-fifth of the current largest 300 US public companies and that three-quarters of the largest US VC-backed companies would not have existed or achieved their current scale without an active VC industry.

2. Geographic Concentration of VC Investors in a Syndicate is Correlated to Deal Structure, Board Representation, Follow-On Rounds, and Exit Performance

Geographic concentration of venture capital investors, corporate monitoring, and firm performance.

A May 2019 Dartmouth paper by Jun-Koo Kang, Yingxiang Li, and Seungjoon Oh finds that compared to VC investors that are geographically dispersed, those that are geographically concentrated use less intensive staged financing and fewer convertible securities in their investments, are less likely to have board representation in their portfolio firms, and are more likely to form successive syndicates in follow-up rounds. Moreover, their firms experience a greater likelihood of successful exits, lower IPO underpricing, and higher IPO valuation.

3. VC firms that lack diversity perform 11%-30% lower on average

VC firms that lack diversity pay a higher cost

A 2017 paper from Paul A. Gompers and Sophie Q. Wang of Harvard documents the patterns of labor market participation by women and ethnic minorities in venture capital firms and as founders of venture capital-backed startups. If the partners of the VC firm are from the same school, the fund has a lower performance of 11%. If the partners have the same ethnicity, the fund has a lower performance of 30%. If the fund is all men, there is a 20% lower performance.

4. Venture Capital infusion harms non-VC backed industries in communities

The Silicon Valley Syndrome

A 2019 paper from Doris Kwon and Olav Sorenson of Yale University demonstrates that an infusion of venture capital in a region actually is more harmful than beneficial. The paper illustrates that VC infusion in a region is associated with declines in entrepreneurship, employment, and average incomes in other industries in the tradable sector while at the same time an increase in entrepreneurship and employment in the non-tradable sector and income equality overall in the region.

For example, the boom of Silicon Valley caused real estate prices in the Bay Area to rise which priced out low-salaried workers in the non technology sector. This caused other firms to lose talent to a handful of Silicon Valley technology companies. This is similar to the Netherlands in the 1960s after the discovery of natural gas which led to booming petroleum exports and the value of the Dutch currency to rise. Yet this also caused harm to other firms due to rising operating costs and to them losing workers to the natural gas extraction industry. The economy was left more vulnerable overall.This became known as “Dutch Disease.”

5. VC’s who’ve been fortunate to succeed once keep succeeding as initial success brings them quality deal flow

The persistent effect of initial success

A 2019 paper from Sampsa Samila (IESE Business School), Olav Sorenson (Yale), and Ramana Nanda (Harvard) illustrated that each additional initial public offering (IPO) among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. Successful outcomes result in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments. What does all this mean?

Get lucky once and everyone thinks you have the right stuff which results in more opportunities and quality deal flow.

6. Half of VC investments are predictably bad—based on information known at the time of investment

Predictably Bad Investments: Evidence from Venture Capitalists

Diag Davenport of the University of Chicago Booth School of Business argued in a 2022 paper that institutional investors fail to invest efficiently. By combining a novel dataset of over 16,000 startups (representing over $9 billion in investments) with machine learning methods to evaluate the decisions of early-stage investors, Davenport showed that approximately half of the investments were predictably bad. This was based on information known at the time of investment and that the predicted return of the investment was less than readily available outside options. Suggestive evidence also illustrated that an over-reliance on the founders’ background is one mechanism underlying these choices. The results suggest that high stakes and firm sophistication are not sufficient for efficient use of information in capital allocation decisions.

7. Getting funded by a reputable VC with a strong brand adds a lot of value

This paper by Darden pressor Ting Xu, Shai Bernstein of Harvard Business School, Kunal Mehta of AngelList LLC, and Richard Townsend of the University of California, San Diego analyzed a field experiment conducted on AngelList Talent. During the experiment, AngelList randomly informed job seekers of whether a startup was funded by a top-tier investor and/or was funded recently. Startups received more interest when information about top-tier investors was provided. Information that included the most recent funding amount had no effect. The effect of top-tier investors is not driven by low-quality candidates and is stronger for earlier-stage startups. Essentially, the potential employees cared about who funded it and not the amount. The results demonstrated that venture capitalists can add value passively, simply by attaching their names to startups.

8. VCs invest in the team rather than the product or technology

How do venture capitalists make decisions?

This paper was written by a rockstar team composed of Steven Kaplan, Neubauer Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business and Kessenich E.P. Faculty Director of the Polsky Center, along with Paul Gompers at Harvard University Graduate School of Business; Will Gornall at the Sauder School of Business at the University of British Columbia; and Ilya Strebulaev at the Stanford University Graduate School of Business. They surveyed 885 institutional venture capitalists at 681 firms about practices in pre-investment screening, structuring investments, and post-investment monitoring and advising. The results showed that VCs see the management team as somewhat more important than business-related characteristics such as product or technology. VCs also view the team as more important than the business to the ultimate success or failure of their investments. The VCs rated deal selection as the most important factor contributing to value creation, more than deal sourcing or post-investment advising.

9. VC has real limitations in its ability to advance substantial technological change

Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn

In this paper, Harvard professors Josh Lerner and Ramana Nanda argue that despite the growth VC brings into technology companies, there remain real limitations in regard to technological change. They are concerned about the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; the relatively small number of venture capital investors who hold and shape the direction of a substantial fraction of capital that is deployed into financing radical technological change; and the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms. They believe this may have ongoing and detrimental effects on the rate and direction of innovation in the broader economy.

10. More collaborative experience among VCs leads to M&A while less leads to an IPO

The Past Is Prologue? Venture-Capital Syndicates’ Collaborative Experience and Start-Up Exits

Dan Wang of Columbia, Emily Cox Pahnke of the University of Washington, and Rory McDonald of Harvard argue that as prior collaborative experience within a group of VCs increases, a jointly funded start-up is more likely to exit by acquisition (which they call a focused success); with less prior experience among the group of VCs, a jointly funded start-up is more likely to exit by initial public offering (which they term a broadcast success). This tested their hypotheses using data from Crunchbase on a sample of almost 11,000 U.S. start-ups backed by venture-capital (VC) firms, using the VCs’ previous collaborative experience to predict the type of success that the start-ups will experience.

11. Solo-founded startups are strongly associated with more rapid growth to unicorn status

In a paper by Greg Fisher, Suresh Kotha, and S. Joseph Chin, startups that have reached unicorn status are thoroughly examined. This is done through prior research on growth and valuation of unicorns as well as examining the dynamics to view the variations in which they reach a billion dollars in valuation. Ultimately, the paper demonstrates that the founder's age, gender, and affiliation with the Ivy League were not significantly related to the growth of unicorns. Furthermore, solo-founded startups are more associated with rapid growth to a unicorn valuation.

12. Warm introductions lead to 13x higher chance of funding

UK Venture Capital and Female Founders Report

Alice Hu Wagner, Calum Paterson, and Francesca Warner illustrate that startup decks that come in warm are far more likely to get funded. This rewards founders who have a great network and are connected but harms the multitude who lack these connections. If founders lack a network of investors, bankers, angels and other founders, fewer will be able to reach a proper VC.

13. Venture capitalists should stay in their lane

Venture capitalists are specialists.

Tyler J. Hull argues that VC performance is much better in the sub-industry they focus on rather than sub-industries where they have limited experience. And they underperform more the further outside their focus they go. Co-investing with another venture capitalist that has the same investment focus as the investment firm partially mitigates this effect. Additionally, the negative effect is shown to be more pronounced the greater the degree of difference between the venture capital’s preferred investment industry and the investment industry.

In other words, VCs should stay in their lane and make investments in their area of focus.

14. Data makes all the difference

Hatcher+ and need for data driven forecasting.

Hatcher+ is a globally diversified, multi-sector, early-stage technology investment fund founded in 2018. Based in Singapore, the managers use a combination of data science, modeling, workflow automation, and machine learning to execute a global venture investment strategy capable of unprecedented scale in terms of the number of investments. As a result, they produced a paper on venture capital transaction history to define and refine its approach to early stage investing. Via their own research, they discovered that data quality is actionable for a data-driven VC firm, accelerator rounds provide a strong opportunity for investment, deal flow is essential (especially for firms with large portfolios), large portfolios with follow on increases viability and adds round diversification, and that larger portfolios by investment count are key to early stage success.

15. Founders can become VCs but that doesn’t guarantee success

Success and failure as a founder plays a role if a founder becomes a VC

Paul A. Gompers & Vladimir Mukharlyamov explore whether or not the experience as a founder of a venture capital-backed startup influences the performance of founders who become venture capitalists. They discovered that almost 7% of VCs were previously founders of a venture-backed startup. Having a successful exit (an acquisition or IPO) as well as being male and white increased the probability that a founder transitioned into a career in VC. Successful founder-VCs have investment success rates that are 6.5 percentage points higher than professional VCs while unsuccessful founder-VCs have investment success rates that are 4 percentage points lower than professional VCs. The primary benefit of a founder-VC is not deal flow but the value add that they provide to their portfolio companies.

16. Successful founders have similar personality traits

The impact of founder personalities on startup success

Paul McCarty et alii. ran a large-scale study over 21,000 startups worldwide and found that personality traits of startup founders differ from that of the population at large. Successful entrepreneurs show high openness to adventure, like being the centre of attention, have higher activity levels. Six different personality types appear for founders: Accomplisher, Leader, Operator, Developer, Engineer, Fighter.

Venture capital is still a young industry and has more bragging rights than most realize. By effectively reading the research conducted by some of the leading academics at top universities, you can give yourself an edge and competitive advantage. This doesn’t cost but I promise you that it will pay.

Did we miss a great research paper that you think VCs should add to their arsenal of knowledge? Email me at [email protected] and I will add it.

OpenVC is a radically open platform that helps tech founders connect with the right investors.

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Venture capital

Entrepreneurial financing
Entrepreneurship
Finance and investing
Investment management

Corporate Venturing

Josh Lerner
From the October 2013 Issue

Bootstrap Finance: The Art of Start-ups

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Hemant Taneja
January 22, 2019

There Are Only Two Types of Venture-Backed Companies

Michael Fertik
April 16, 2013

The Top Ten Lies of Entrepreneurs

Guy Kawasaki
From the January 2001 Issue

A Stealthier Way to Raise Money

David Champion
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Entrepreneurs Versus Executives at Socaba.com

Regina Fazio Maruca
From the July–August 2000 Issue

How the Market Ruined Twitter

October 31, 2014

Why the U.S. Innovation Ecosystem Is Slowing Down

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Sharon Belenzon
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November 26, 2019

What High-Quality Revenue Looks Like

Anthony K. Tjan
February 07, 2013

Does Silicon Valley Still Care About Climate Change?

Walter Frick
May 30, 2017

What African Fintech Startups Can Teach Silicon Valley About Longevity

Glory Enyinnaya
Olamitunji Dakare
May 19, 2023

What Venture Trends Can Tell You

William F. Meehan III, Ron Lemmens, and Matthew R. Cohler
From the July 2003 Issue

Research: The Gender Gap in Startup Success Disappears When Women Fund Women

Sahil Raina
July 19, 2016

The Disruption of Venture Capital

Eugene Chung and Maxwell Wessel
January 26, 2012

The Other Diversity Dividend

Paul Gompers
Silpa Kovvali
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Groupon Doomed by Too Much of a Good Thing

Rob Wheeler
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Start-Up Capital Is Spreading Across the U.S.

Ian Hathaway
February 23, 2015

Venture Financing and Entrepreneurial Success

William Kerr
May 12, 2010

What Western Investors Want from African Entrepreneurs

Ronald Klingebiel
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What Is Venture Capital?

June 2, 2020
Corporate Venture Capital
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As a decade of growth in venture capital investment falters amid uncertain economic conditions, one thing remains constant: VCs will keep searching for companies that do business in a way that’s never been done before.

Venture capital has experienced a boom over the past decade.

Fueled by billion-dollar exits, the explosion of Silicon Valley startups, and massive raises from SoftBank’s $100B Vision Fund, annual capital invested worldwide increased by nearly 13x from 2010 to 2019 to reach over $160B . Meanwhile, mega-rounds (investments of $100M+) nearly tripled from 2016 to 2018.

However, the economic downturn brought on by Covid-19 has to some extent put the brakes on that growth. Fewer VCs are investing in seed-stage startups, and March 2020 saw a 22% year-over-year (YoY) decline in overall VC deals in the US.

It’s likely that VCs are being more selective in their investments, preferring more established companies that have proven themselves to be strong enough to weather the pandemic and grow when the economy ramps back up.

But venture capital is in many ways resistant to short-term changes, due to the simple fact that venture investments are long-term. VCs aren’t necessarily looking to invest in startups that will see huge growth in the immediate future; they are looking for ones that will grow into something extraordinary 10 years from now.

Overall, the fundamentals of venture capital haven’t changed. VCs place their bets on startups poised to jump-start a fundamental change in consumer or business behavior — and this fact is no different now than it was when the industry began.

In this report, we explore the foundations of venture capital by diving into its key terms and definitions, the motivations and thought processes of VCs, and what VCs — and startups — look for at each investment stage.

What is venture capital, a game of home runs, why startups seek vc funding.

The VC food chain

Who are LPs?

Vcs to startups, the venture deal, tips and sources, inbound deals, market size, founding team, pro rata rights, liquidation preference, the venture capital financing cycle: seed to exit.

Venture capital is a financing tool for companies and an investment vehicle for institutional investors and wealthy individuals. In other words, it’s a way for companies to receive money in the short term and for investors to grow wealth in the long term.

VC firms raise capital from investors to create venture funds, which are used to buy equity in early- or late-stage companies, depending on the firm’s specialization (although some VCs are stage-agnostic). These investments are locked in until a liquidity event, such as when the company is acquired or goes public, at which point VCs realize profits from their initial investment.

Venture capital is characterized by high risk, but also high reward. On the one hand, VCs must invest in emerging technologies and products that have massive potential to scale, but aren’t profitable yet — and over two-thirds of VC-backed startups fail . At the same time, VC investments can prove to be enormously profitable, depending on how successful a portfolio startup is.

For example, in 2005, Accel Partners invested $12.7M in Facebook for a ~10% equity stake. The firm sold a part of its shares in 2010 for around half a billion dollars, and went on to make over $9B when the company went public in 2012.

Mark Zuckerberg, Sheryl Sandberg, and Accel Partners partner Jim Breyer. Source: Jim Breyer via Medium

Another important characteristic of venture capital is that most investments are long-term. Startups often take 5 to 10 years to mature, and any money invested in a startup is difficult to pull out until the startup is robust enough to attract buyers in the mergers & acquisitions, secondary, or public markets. Venture funds have a 10-year lifetime, so VCs can see through these investments without the pressure to demonstrate short-term gains.

On the company side of VC transactions, venture capital allows startups to finance their operations without taking on the burden of debt. Because startups pay for venture capital in the form of shares, they don’t have to incur debt on their balance sheets or pay the money back. For startups looking to grow quickly, venture capital is an attractive financing option, potentially allowing startups to outpace the competition as they take in more investments at each growth stage.

Startups also take on venture capital to tap into VCs’ expertise, networks, and resources. VCs often have a wide network of investors and talent in the markets they operate in, as well as years of experience overseeing the growth of many startups. The mentorship VCs can bring is especially valuable for first-time founders.

Today, venture capital is most active in the B2C software, B2B software, life sciences, and direct-to-consumer (D2C) industries. The software industry is fertile grounds for VC investment because of its low up-front costs and huge addressable market. Companies like Google , Twitter , and Slack have risen to dominance thanks in part to venture financing.

The life sciences sector, while a more capital-intensive area for companies to start out in, also offers a giant addressable market and technological and regulatory moats to protect against competition. The sector is also attracting increased attention during the coronavirus pandemic.

The D2C industry has also been a large focus for VC funding, with companies like Warby Parker delivering affordable, well-made products at scale through online channels.

Until 1964, Babe Ruth held the record for the most career strikeouts, at 1,330. Despite that, he also hit 714 home runs in his career, giving him the highest slugging percentage of all time. When Babe Ruth went to bat, he swung for the fences.

VCs espouse a similar strategy. By taking stakes in companies that have a small chance of becoming enormous, they make investments that tend to be either home runs or strikeouts. Chris Dixon, a general partner at Andreessen Horowitz , calls this the Babe Ruth Effect.

According to Dixon, great funds with a 5x or greater return rate tend to have more failed investments than good funds with 2-3x returns. In other words, great VCs are bigger risk-takers than good VCs: They make fewer bets on “safe” startups that do fairly well, and more bets on startups that will either flop or transform the industry.

Source: Chris Dixon

These great funds also have more home-run investments (investments that return more than 10x) and even home runs of greater magnitude (returning around 70x).

This is why Peter Thiel, an early investor in Facebook, looks for companies that create new technology, rather than companies that replicate something that already exists. He observes that these new technologies enable “vertical progress,” where something is transformed from “0 to 1.”

He cautions against “horizontal” or “1 to n” progress: taking an existing technology and spreading it elsewhere, such as by recreating a service in a new geographic location.

That said, many VCs do ride on trends and invest in incremental companies. One reason for this is that the reputational cost of failing on a contrarian bet is high: If a fund flops, its investors might be more forgiving of investments that were widely thought to be the next big thing.

Generally speaking, bankers do not lend to startups the way they may offer traditional loans to other businesses (e.g. agreements where the borrower agrees to pay back a principal, plus a set level of interest).

Banks rely on financial models, income statements, and balance sheets to determine whether a business qualifies for a loan — documents that aren’t as useful when gauging an early-stage startup’s value. Furthermore, in the early stages, there is hardly anything for banks to hedge as collateral. Whereas an established company may have factories, equipment, and patents, which a bank could take in the event of a foreclosure, a software startup might leave behind a few laptops and office chairs.

VC firms are better attuned to evaluating early-stage startups, using metrics that go beyond financial statements — such as product, market-size estimates, and the startup’s founding team.

These tools are by no means perfect, and most investments will lose their value. However, because equity returns are uncapped, the high risk of investing in startups can be justified. While debts are structured so that a lender can only recuperate the principal and a set amount of interest, equity-based financing is structured so that there is no upper limit to how much an investor can earn.

Broadly, the equity financing model has served the startup ecosystem well. Startups can accelerate growth without slowing down to pay down debt, as they would with a traditional business loan, and VCs can capitalize on the rapid growth of startups upon their exits.

However, giving out equity in exchange does carry two main liabilities for companies: loss of upside and loss of control.

Because equity is partial ownership of the company, investors are paid a percentage share of the total price of the acquisition or IPO when the company exits. The more equity a startup gives out, the less is left for founders and employees. And if the company grows extremely valuable, the founding members may end up missing out on a much greater amount than what they would have paid if they had taken on regular debt financing, rather than equity funding.

Giving out equity can also mean ceding control. VCs become shareholders, often sitting as board members. They may apply pressure to important business decisions, from when products launch to how the company exits. Because VCs need big exits to boost their overall fund performance, they may even urge decisions that lower the chance of moderate success, while increasing the odds that the startup, if successful, returns 100x.

Get the full report On Venture capital here

The venture capital food chain.

VCs raise their money from limited partners (LPs), institutional investors who serve the interests of their client organizations.

The interests and incentives of LPs greatly influence VCs’ investment strategies. This section will examine the flow of influence and relationships across the chain, from the LPs’ institutions to the VC-backed startups.

LPs are typically large institutional investors, such as university endowments, pension funds, insurance companies, and nonprofit foundations. (Some LPs are wealthy individuals and family offices.) They can manage up to tens of billions of dollars, which they invest in diversified portfolios.

An LP’s portfolio must serve the needs of the institution by growing its asset base year-over-year, while also funding expenses of the institution.

For example, Harvard’s endowment funds a large portion of the school’s annual operation. If its $40B+ endowment grows at 5% annually, but the university’s expenses on average cost 6% of the endowment, the asset base will shrink by 1% every year. A weakening endowment can endanger the institution’s standing and hamper its ability to hire the best professors, attract top students, and fund leading research.

Similarly, pension funds are responsible for funding pensioners’ retirements; insurance company reserves are responsible for payouts; and nonprofit foundation reserves are responsible for financing their organizations’ grants.

As LPs manage risk and grow their asset base at a sustainable rate, venture capital’s role in their portfolio is to (hopefully) produce the investment’s alpha — excess returns relative to a benchmark index.

LPs invest in venture capital by pledging a certain amount in VC funds. The size of these funds can range from $50M to, in some cases, billions.

Over the past few years, greater influxes of capital into VC firms have led to the rise of $1B+ mega-funds and an increased number of sub-$100M micro-funds.

In 2018, for example, Sequoia Capital raised $8B for its Global Growth Fund III, $1.5B of which it has dispersed in 15 growth-stage startups (as of January 2020). The fund’s largest investment so far was $384M to China-based Bytedance , the TikTok parent company.

On the other end of the spectrum, Catapult Ventures raised a $55M fund in 2019 that targets seed-stage startups specializing in AI, automation, and internet of things (IoT). In April 2020, the firm participated in a $3.3M seed round for Strella Biotechnology , a company that optimizes supply chains for fresh produce.

VCs raise capital from LPs by pitching their track record, projections into the fund’s performance, and hypotheses on promising areas of growth.

Fundraising can take a long time, so VCs will often do a “first close” after hitting 25-50% of the target amount and then start investing those funds before the final close.

Most funds have a 2-20 structure: 2% management fee and 20% carry. The 2% fee covers the firm’s operating expenses — employee salaries, rent, day-to-day operations.

The “carry,” meanwhile, is the essence of VC compensation — VCs take 20% of the profit their funds make. While investing in a potential Google or Facebook can generate more than enough profit to go around for both VCs and their LPs, a 20% carry can become a pain point for LPs when a VC delivers thin margins.

In return for high fees, high risk, and long-term illiquidity, LPs expect VCs to deliver market-beating returns. Generally speaking, they expect VCs to return 500 to 800 basis points higher than the index. For example, if the S&P 500 returned 7% annually, LPs would expect venture capital to return at least 12%.

The higher a VCs’ returns, the more prestige the firm gains. Some of the most well-known funds include:

Andreessen Horowitz’s Andreessen Fund I, which performed in the top 5% of funds raised in 2009, with a 2.6x return on investment (ROI)
Sequoia Capital’s 2003 and 2006 funds, which brought 8x in returns, net of fees
Benchmark ’s 2011 fund, which carried 11x in returns, net of fees

If VCs fail to deliver market-beating returns or even lose LPs’ money, their reputation takes a hit, making it difficult to raise new funds to cover expenses. To stay in business, VCs need to invest in high-performing startups that yield returns that will keep their LPs happy, while still leaving the fund with a generous carry to take home.

For VC funds to yield market-beating rates of returns, VCs need companies that return 10 to 100 times their investment.

Because 67% of VC-backed startups fail , and there is only a slim chance — at most 1.28% — of a billion-dollar company being created, VCs need startups that return astronomically to make up for the inevitable failures.

A closer look at how VC returns are distributed demonstrates how extremely disproportionate investment performance is across VC-backed startups.

VC returns follow a power-law curve: one quantity varies with the power of another. This means the highest performer has exponentially greater returns compared to the second highest, and so on.

As a result, distribution is heavily skewed, with a few top investments bringing in the lion’s share of the returns. (The rest, called the “long tail,” generate only a fraction.)

The cost of missing an investment at the high-return end is enormous, while netting one has the potential to return the fund many times over, even if the rest of the portfolio flounders.

What keeps VCs up at night isn’t the portfolio companies that go bust — it’s the wildly successful ones that got away.

The VC industry as a whole follows the power-law curve, just as VC investments do.

In other words, funds managed by a few elite firms generate most of the wealth, and the long tail is littered with funds that don’t make the industry average rate of return.

Top investment opportunities are scarce. While there may be more financing rounds, there is only one Facebook Series A round. Once that window closes, it’s closed for good: There’s no way to invest under the same terms and conditions.

VCs compete with one another to get a seat at the table in these highly sought-out rounds, where the lead investor is usually an elite firm, such as Sequoia Capital, Accel Partners, or Kleiner Perkins .

Because of the Babe Ruth Effect, closing the right deal is the most important activity a VC does. In a survey of nearly 900 early- and late-stage VCs, deal flow and selection together were reported to make up about 71% of the value VCs create.

Source: Antoine Buteau via Medium

No amount of mentorship or cash can transform a mediocre company into the next Google. That’s why VCs spend the bulk of their time and effort gaining access to the best deals, evaluating and selecting their investments, and hammering out the details in the term sheet (more on this below).

How VCs source deals

Steady access to high-quality deals is crucial for a VC to succeed. Without healthy deal flow, a VC can miss out on high-profile investment rounds and fail to discover high-potential startups in their infancy. Each time a VC fails in this regard, its fund is at risk of underperforming against the competition.

Therefore, VCs will go to great lengths to improve the quality of their deal flow. Successful VCs have a strong network that helps them capture investment opportunities, as well as a strong brand that generates a steady stream of inbound deals.

A rich and diverse network is often a VC’s best source of deals. VCs rely on their network to connect to promising founders whose startups fit the investment thesis.

Firstly, VCs network with one another by investing jointly in companies, sitting on boards together, and attending industry events. VCs will often invite others in their network to investment rounds or refer startups that aren’t a match to their firm.

VC firms also rely on a professional network of entrepreneurs, investment bankers, M&A lawyers, LPs, and others they’ve worked with in growing and selling startups.

Accelerators — which offer a kind of entrepreneurship boot camp for founders — also maintain close relationships with VCs, often becoming joint investors. In 2009, Paul Graham of accelerator Y Combinator tried to loop Fred Wilson of Union Square Ventures into investing with him in Airbnb — and Wilson famously declined.

Lastly, MBA programs and university entrepreneurship centers are also good deal sources for VCs. One example is DoorDash , which started as a Stanford Business School project, and went on to raise more than $2B of capital and be valued at nearly $13B.

If there isn’t a good bridge in their network to connect with a promising startup, however, VCs will resort to the tried-and-true method of cold emails to express interest in partnering.

Building a robust network isn’t enough for a VC to gain maximum exposure to the highest-quality deals. Given the scarcity of unicorn startups and the intensity of competition, VCs need to build a strong brand to improve the flow of inbound deals.

There are largely two ways in which VCs differentiate their brand and offerings: thought leadership marketing and “value-add” services.

By becoming thought leaders, VCs attract a community of entrepreneurs and other investors that look to them for expertise and authority. VCs build their platforms by writing, blogging, tweeting, and speaking publicly at various events.

First Round Capital publishes long-form articles on leadership, management, and teamwork for early-stage entrepreneurs. Fred Wilson of Union Square Ventures has run a daily blog since 2003 where he shares various behind-the-scenes insights into the industry. Bedrock Capital brands itself as a firm that discovers “narrative violations” — companies challenging a commonly accepted narrative.

Pairing thought leadership expertise with an enticing “value-add” service can be a powerful way to lure top startups. VCs add value to their portfolio companies beyond just offering capital; they deliver mentorship, network, and technical support.

Andreessen Horowitz provides its companies with a full-stack marketing and accounting service. GV , the VC arm of Alphabet , has an operations team dedicated to helping startups with product design and marketing. First Round Capital holds leadership conferences and mentorship programs specifically geared toward early-stage founders, offering a community of relationships beyond just the firm itself.

How VCs select investments

Evaluating a startup presents a unique challenge. Often, there aren’t comparable businesses, accurate market-size estimates, or predictable models. As a result, VCs rely on a mix of intuition and data to assess whether the startup is worth investing in and how much it should be valued at.

VCs chase after opportunities with a large total addressable market (TAM). If the TAM is small, there is a limit to the returns the VC can reap when the company exits — which is no good for VCs that need companies exiting at 10-100x in order to be recognized as one of the elites.

But VCs don’t just want to invest in companies situated within large addressable markets from the get-go. They also want to bet on companies that grow their addressable markets over time.

Uber’s TAM grew 70x over 10 years, from a $4B black-car market to a near $300B cab and car ownership market. As the product matured, its cheaper, more convenient service converted customers , starting a network effect in which costs decreased as ride availability increased.

Bill Gurley, general partner at Benchmark (which has invested in Uber), sees the company eventually taking on the entire auto market, as ride hailing becomes preferable to owning a car.

Another example is Airbnb, which started in 2009 as a couch-surfing website for college students. At the time, its own pitch deck told investors that there were only 630,000 global listings on couchsurfing.com. But by 2017, Airbnb had 4M listings — more rooms than the 5 biggest hotel groups combined. Its TAM had grown with it.

It’s challenging to predict the magnitude of the impact a product will have on its market. According to Scott Kupor, managing partner at Andreessen Horowitz and author of “Secrets of Sand Hill Road,” VCs must be able to “think creatively about the role of technology in developing new markets” to seize great investments, rather than take TAM at face value.

Another key consideration is product-market fit, a nebulous idea that refers to the point when a product sufficiently meets a need in a market, such that adoption grows quickly, while churn remains low. The majority of startups fail because they don’t find product-market fit, which is why many venture capitalists hold that it is the most important goal for an early-stage company.

There isn’t a particular point at which product-market fit occurs; rather, it happens through a gradual process that could take from several months to several years. Neither is it permanent once it’s reached: Customer expectations are constantly changing, and products that once had strong product-market fit can fall out of it without proper adjustments.

It’s also important to understand that product-market fit doesn’t equate to growth. A spike in usage driven by early adopters may look impressive on a dashboard, but if the numbers drop off in a few weeks, it’s not a good indicator of product-market fit.

Founders have gone to extreme lengths to nail product-market fit, from Stewart Butterfield scrapping his mobile game company before arriving at Slack to Tobias Lütke using his online snowboarding shop’s infrastructure to build the e-commerce platform Shopify .

These startups succeeded in scaling exponentially because they were able to reach product-market fit before ramping up sales and marketing. (What is dangerous is scaling prematurely before hitting product-market fit, as about 70% of startups do, according to Startup Genome.)

Product-market fit can be difficult to measure because a product could be anywhere from a few iterations to a significant pivot away from achieving it. However, there are a few quantitative benchmarks that can show a startup’s progress.

A high Net Promoter Score (NPS), for instance, shows that customers not only recognize the value of the product, but are willing to go out of their way to recommend it to other people.

Similarly, for angel investor Sean Ellis, product-market fit can be reduced to the question, “How would you feel if you could no longer use [the product]?” The users who respond “Very disappointed” make up the market for that product.

Another simple framework looks for strong top-line growth accompanied by high retention and meaningful usage.

Source: Brian Balfour

Strong product-market fit is a compelling sign that a startup will become successful. VCs look for startups that have already achieved it or have a concrete road map toward it. By the Series A stage, a startup generally needs to show investors that it has achieved or made visible progress toward product-market fit.

At the seed stage, a startup is nothing more than a pitch deck. Josh Kopelman of First Round Capital says that, at the seed stage, it’s likely that a startup’s product is wrong, its strategy is off, its team is incomplete, or it hasn’t built the technology. In those cases, what he bets on is not the startup idea, but the founder.

When a VC invests in a startup, the VC is wagering that the company will become what Scott Kupor calls the “de facto winner in the space.” VCs must therefore prudently decide whether a founding team is the best team to tackle this market problem over any others that may come to them for funding at a later time.

VCs look for founders with strong problem-solving skills. They ask questions to get a glimpse of how the founder thinks through certain problems. They get a sense of whether the founder has the flexibility to navigate through challenges, adapt to changes in the market, and even pivot the product when necessary.

They also look for founders that have a coherent connection to the space they’re looking to disrupt. Chris Dixon says that he looks at whether founders have industry, cultural, or academic knowledge that led them to their idea.

Emily Weiss, founder of Glossier , worked in fashion before launching the DTC beauty company. Airbnb’s founders understood the culture of a generation willing to share homes and experiences. Konstantin Guericke, co-founder of LinkedIn , studied software engineering at Stanford before arriving at the idea that professional networking could be done online.

VCs also favor founders who have previously founded unicorn startups. These founders have the experience of taking a company from zero dollars in revenue to billions, and they understand what it takes to transition the company at each level. They also have media coverage and a robust network — all contributing to recruiting talent and attracting resources.

For example, a group of early PayPal employees, called the PayPal Mafia, went on to start a number of highly successful startups, including Yelp , Palantir , LinkedIn, and Tesla . Other startup “mafias” — made up of early employees-turned-founders — continue to branch off from mature startups like Uber and Airbnb, in turn attracting additional VC attention and funding.

The term sheet

The term sheet is a nonbinding agreement between VCs and startups about the conditions of investing in the company. It covers a number of provisions, the most important being valuation, pro rata rights, and liquidation preference.

The valuation of the startup determines how much equity investors will own from a certain amount of investment. If a startup is valued at $100M, a $10M round of investment will give the investors 10% of the company.

$100M would be the pre-money valuation of the company — how much the company is worth before the investment — and $110M would be the post-money valuation.

A higher valuation allows the founder to sell less of the company for the same amount of money. Existing shareholders — founders, employees, and any previous investors — experience less share dilution, which means greater compensation when the company is eventually sold. Selling less of the company in a given investment round also means the founder can raise more money down the line while keeping the level of dilution in check.

However, a high valuation comes with high expectations and pressure from investors. Founders who have pushed investors to the brink of what they’re comfortable paying will have little room for mistakes. Each round generally needs to yield at least double the valuation of the previous one, so a high valuation will also be harder to overshoot.

Another downside to a high valuation is that investors may veto moderate exits because their stake in the company requires a bigger exit to be worthwhile. Investors may not allow a company with a valuation over $100M to exit for anything less than $300M, while they might be okay with a lower-valued company being acquired for a more moderate sum.

Pro rata rights give an investor the ability to participate in future financing rounds and secure the amount of equity they own.

If earlier VCs don’t follow on in their investments, their shares get progressively diluted with each financing round. If they owned 10% of the company upon investment, they will lose 10% of that initial ownership each time the startup offers up 10% to new investors.

Exercising previously secured pro rata rights can become a source of tension between early VCs that want to pitch in and protect against share dilution and downstream VCs who want to buy as much of the company as possible.

The liquidation preference in a financing contract is a clause that determines who gets how much in the event that a company liquidates.

VCs, the preferred shareholders, are prioritized in the event of a payout.

A 1x multiple guarantees the investor will be paid at least the investment principal before others are paid out. The seniority structure determines the order in which preferences are paid. “Pari passu” seniority pays all preferred shareholders at the same time, while standard seniority honors preferences in reverse order, starting with the most recent investor.

As rounds get bigger and more investors get involved, a company should pay attention to managing its liquidation stack so that investors aren’t disproportionately rewarded in a payout without leaving much behind for founders and employees.

The average VC-backed startup goes through multiple rounds of funding in its lifetime.

At the initial or seed stage, most of the capital is allocated to developing the minimum viable product (MVP). Angel investors and the founder’s friends and family often play a big role in funding the startup at the seed stage.

At the early stages, capital is used for growth: developing the product, discovering new business channels, finding customer segments, and expanding into new markets.

At the later stages, the startup continues to scale revenue growth, although it may not yet be profitable. Funding is generally used to expand internationally, acquire competitors, or prepare for an IPO.

In the final stage of the cycle, the company exits through a public offering or an M&A transaction, and shareholders have the opportunity to realize gains from their equity ownership.

Seed- to early-stage investments are inherently more risky than late-stage investments, because startups at these stages don’t yet have a commercially scalable product in place. At the same time, these earlier investments also generate higher returns, as early-stage startups with low valuations have much more room to grow.

Later-stage investments tend to be safer because startups at this stage are usually more established. This isn’t necessarily true in every case: Some technologies take longer to mature, and late-stage investors may still be betting on them to hit mass-market adoption.

Not all companies proceed down this funnel. Some founders choose not to raise further rounds of venture capital, instead financing the startup with debt, cash flow, or savings.

Two big reasons founders choose to “bootstrap” are to maintain ownership of the company’s direction and build at a sustainable pace. Because venture capital comes with investor expectations that the company will grow rapidly month-to-month, VC-backed startups can fall into the trap of burning cash for more customers.

This short-term pressure to produce can lead startups to lose sight of their long-term creative vision. Recognizing this setback, founders of the video-sharing platform Wistia , for one, chose to take on debt instead, writing in a blog post that they “felt confident that the profitability constraints the debt imposed would be healthy for the business.”

On the flip side, Facebook is an example of a company that has successfully scaled through various stages of the venture capital cycle. The startup’s trajectory culminated in a $16B IPO at a $104B valuation, making it one of the most successful VC-backed exits of all time.

To some extent, Facebook’s rise to the top seems inevitable. Its monthly active users grew exponentially from 2004 to 2012 , from just 1M to over 1B. In 2010, it surpassed Google as the most-visited website in the US, accounting for over 7% of weekly traffic.

But in the first few years of its founding, Facebook was considered overvalued. In 2005, Facebook’s Series A $87M valuation was thought to be too high, and investor Peter Thiel chose not to follow on. In 2006, Facebook’s users were still limited to 12M college students, and investors expected the service to fizzle out when it was released to a broader user base.

This section will cover the basic objectives of each venture funding stage, while examining the specific steps Facebook took toward a successful exit that created billions in wealth for its investors.

At the seed stage, a startup is no more than the founders and the idea. The purpose of the seed round is for the startup to figure out its product, market, and user base.

As the product starts to gain more users, the company may then look to raise a Series A. However, most startups fail to gain traction before the money runs out, and end up folding at this stage.

Seed-stage investments typically range from $250,000 to $2M, with a median between $750,000 and $1M. Angel investors, accelerators, and seed-stage VCs, such as Y Combinator, First Round Capital, and Founders Fund, invest in these rounds.

When Facebook raised its seed round, Peter Thiel, who had co-founded PayPal and had turned to angel investing, became the company’s first outside investor, buying 10.2% stake for $500,000. This put Facebook’s valuation at $5M.

LinkedIn co-founder Reid Hoffman, who also invested in the round, recalled that Zuckerberg was painfully quiet and awkward, with “a lot of staring at the desk” during their meeting. Nonetheless, Facebook’s “unreal” user engagement levels on college campuses tipped Thiel and Hoffman over the edge to invest.

Facebook used the funding to relocate to an office a few blocks away from the Stanford campus and hire more than 100 employees, many of whom were graduates of the college’s engineering program.

By the time a startup raises a Series A, it has developed a product and a business model to prove to investors that it will generate profit in the long run. The purpose of fundraising in this round is to optimize the user base and scale distribution.

Some startups skip the seed round and start by raising a Series A. This tends to happen if the founder has established credibility, prior experience in the market, or a product that has a high chance of scaling quickly with the right execution (e.g. enterprise software).

Series A rounds range from $2M-$15M, with a median of $3M-$7M. Traditional VCs such as Sequoia Capital, Benchmark, and Greylock tend to lead these rounds. While angels may co-invest, they don’t have the power to set the price or impact the round.

Accel and Breyer Capital led Facebook’s Series A in 2005, bringing its post-money valuation to nearly $100M.

At the time, Facebook was still limited to college students, with fewer than 3M users, while rival network Myspace had more than four times that. Securing this second round of capital allowed Facebook to expand to 1,400 colleges nationwide and improve the user experience with better features. While the full-scale Facebook Ads platform wouldn’t be developed until 2007, Facebook began to experiment with sponsored links and banner ads at this stage.

By the time a startup raises a Series B, it will have ideally established itself in a principal market and is looking to scale rapidly. It will use the money to ramp up sales and marketing efforts, expand geographically, and even acquire smaller companies.

The size of Series B rounds can go upwards of tens of millions. They are led by the same investors as Series A, and some later-stage firms, such as IVP , start to get involved.

In 2006, Greylock Partners and Meritech Capital Partners joined in Facebook’s $27.5M Series B. By then, Facebook’s user base had grown exponentially to more than 7M users. It ranked as the seventh most-visited website at this point.

Soon after the round, Facebook opened its website to the broader public, allowing anyone with a valid email address to join. Open registration was a huge success, bringing the number of users from 9M in September 2006 to 14M in January 2007.

When a startup raises a Series C, it is often getting ready for M&A opportunities or for an IPO. The money raised in this round will continue to finance its expansion efforts from its Series B stage, including expanding geographically (even internationally), acquiring competitors, and developing new products.

A Series C can range from tens to hundreds of millions. Early-stage VCs may invest in this round, but late-stage investors, including private equity firms, hedge funds, late-stage arms of investment banks, and big secondary market firms also participate.

In October 2007, Microsoft bought a 1.6% stake in Facebook for $240M, putting Facebook’s valuation at $15B.

The deal was a strategic partnership: Microsoft would sell Facebook’s banner ads shown outside the US and split the revenue. Facebook used the capital to hire more employees, expand overseas, and launch Facebook Ads, a comprehensive advertising platform for businesses of all sizes.

By the time a company is raising late-stage rounds, it is usually looking to go public. Capital from late-stage investments is used to drive down prices, suppress competitors, and create favorable conditions for an IPO.

In the past few years, many companies have been spending more time at this stage, rather than moving forward with an IPO. A number of tech unicorns, such as Postmates and Stripe , are all pending IPOs, despite posting billions in revenues.

Unfavorable market conditions coupled with easy access to private capital are fueling the trend toward larger, later exits. The disappointing public market debuts of Uber and Lyft in 2019 have led big startups to reconsider their exit strategies. Larger venture funds and bigger rounds mean that they can afford to stay private longer and build bigger war chests.

In 2009, Facebook raised a $200M Series D round from the Russia-based internet company Digital Sky Technologies (DST), putting its valuation at $10B. Then, in 2011, Facebook raised $1.5B at a $50B valuation in a Series E round with participation from DST and Goldman Sachs’ venture arm .

During an IPO, a company that’s been funded by private investors sells public shares for the first time. IPOs are often thought of as the ideal exit scenario, because founders keep control of the company while shareholders enjoy high payoffs.

An alternative exit strategy is a merger or acquisition. Acquisitions can also be highly profitable, but founders often have to give up control. For instance, Instagram was acquired by Facebook for $1B in 2012, but its co-founders left the company in 2018 when they couldn’t see eye-to-eye with Mark Zuckerberg.

Facebook turned down many acquisition offers throughout the years, including a $1B offer from Yahoo! in 2006.

Zuckerberg floated the idea of an IPO in 2010, but at the time said the company was “in no rush.” By 2012, Facebook had more than 500 round-lot stockholders, subjecting it to SEC disclosure rules despite its status as a private company. Facebook took steps toward an IPO by buying up smaller companies to enhance its offerings and solidify its foothold in the consumer internet space.

In May 2012, Facebook raised $16B in its IPO , putting the company’s valuation at $104B and producing net profits in billions for early investors like Thiel, Accel Partners, and Breyer Capital.

Facebook’s continued success, however, would go on to make its IPO look like a bargain. As its revenue continued to grow — from around $5B in 2012 to over $70B in 2019 — its stock price also climbed, trading at over 6 times its IPO price as of May 2020.

Mapping the venture capital and private equity research: a bibliometric review and future research agenda

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Published: 04 October 2022
Volume 61 , pages 173–221, ( 2023 )

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Douglas Cumming ORCID: orcid.org/0000-0003-4366-6112 1 , 2 ,
Satish Kumar 3 , 4 ,
Weng Marc Lim 4 , 5 &
Nitesh Pandey 3

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The fields of venture capital and private equity are rooted in financing research on capital budgeting and initial public offering (IPO). Both fields have grown considerably in recent times with a heterogenous set of themes being explored. This review presents an analysis of research in both fields. Using a large corpus from the Web of Science, this study used bibliometric analysis to present a comprehensive encapsulation of the fields’ geographical focus, methodological choices, prominent themes, and future research directions. Noteworthily, the foundational themes in venture capital research are venture capital adoption and financing processes , venture capital roles in business , venture capital governance , venture capital syndication , and venture capital and creation of public organizations. In private equity research, style drift into venture capital emerges as a key theme alongside buyouts and privatization , and valuation and performance of private equity investment .

Plain English Summary

Financing is an important aspect of business that creates opportunities for investors and invested entities. Venture capital and private equity are two major vehicles of financing a business. While venture capital manifests as small investments that support the business operations of a large number of promising firms (more risky) in the early stage (startup), private equity transpires as large investments that support the business expansion of a small number of stable firms (less risky) in the later stage (scaleup). This study presents state-of-the-art insights into the current trends and future directions of venture capital and private equity using a bibliometric analysis of high-quality research on these forms of financing.

Venture Capital

Avoid common mistakes on your manuscript.

1 Introduction

Venture capital is one of the primary methods by which private equity investors make funds available to startups, early-stage, and emerging companies that have high growth potential. Arising out of financing research on innovation and economic growth (Hsu & Kenney, 2005 ), venture capital is a widely researched area among entrepreneurship and finance scholars. Similarly, private equity, which hosts venture capital, has also seen considerable growth in its research and practice. Investors usually contribute to private equity funds to capitalize on investment opportunities that may not be available to them through other channels of investment (Fuchs et al., 2021 , 2022 ). Private equity is often considered costlier than public equity (Brav, 2009 ), causing private firms to choose debt financing. However, with the deregulation of capital markets, large investors’ access to private equity funds has increased (Ewens & Farre-Mensa, 2020 ), which has potentially increased their ability to fund businesses, thus leading to a decline in initial public offering (IPO). The assets managed by PE firms have increased by nearly 70% in the past five years (Dai, 2022 ). Today, venture capitalists and private equity funders engage in a variety of activities, including socially responsible investing or impact investing (Barber et al., 2021 ), with venture capital being seen as one of the more prominent methods of financing new ventures (Ho & Wong, 2007 ) along with being signal for the quality of the venture for outside investors (Revest & Sapio, 2012 ).

Many studies on venture capital and private equity exist, and they continue to proliferate over time. This may be attributed to the increased prominence and role of venture capital and private equity funds in the capital market. A closer look at such studies in this review reveals that research on venture capital and private equity is rooted in capital budgeting and IPO research, and early studies in the field have studied venture capital and private equity from that perspective. With the increasing role of venture capital and private equity funds and their diversified portfolios, the two fields have grown in authority with various prominent subfields, and thus, they are investigated separately in recognition of venture capital as a substantially large field of research that warrants its own scrutiny and private equity as a core and mature field of research. With the growth of venture capital and private equity research and the increasing heterogeneity of topics investigated, there is a need to conduct a comprehensive review of studies in both fields in order to take stock of their performance and scientific contributions. Noteworthily, a field can only advance when new research extends prior research, and crucial to that endeavor is a good understanding of the state of the field.

To this end, this study aims to present a comprehensive encapsulation of venture capital and private equity research. Two separate datasets of literature corpus—i.e., venture capital and private equity—are sourced and scrutinized to gain insights into the performance and science of research in both fields. For this purpose, this study takes up several objectives, which are further refined into research questions.

The first objective of this study is to present a performance analysis of venture capital and private equity research, including the fields’ primary contributors. A performance analysis is quite common among literature review studies (Donthu et al., 2021 ). The analysis of this style may seem overly descriptive to veterans of both fields, but it is invaluable to emerging scholars—particularly the ones pursuing their PhDs. Specifically, the analysis presents new scholars with knowledge of where to look for quality research in both fields. Yet, veterans may consider such insights positively too when they choose to view it as an opportunity to gain an objective and updated overview of the progress of both fields at a glance without engaging in duplicative efforts to gain the same insight. Moreover, they stand to gain recognition for their contributions in terms of productivity and impact, as this study will reveal. Based on the discussion, we present the following research questions:

RQ1. What are the publication patterns in the fields of venture capital and private equity?

RQ2. Who are the most prolific contributors to the fields of venture capital and private equity?

RQ3. Which are the most cited articles in the fields of venture capital and private equity?

The second objective of this study is to present an analysis of the most dominant methodologies in venture capital and private equity research, including the classification of research in both fields across the different research approaches, designs, and data types (Baker et al., 2020 ). In addition, this study will also present the geographical regions in which venture capital and private equity studies have predominantly taken place. The classification of geographical regions in this study is distinct from the typical list of countries that are most prolific in publishing research in the field; instead, the classification herein will focus on the source of the samples for each study. This is particularly insightful in today’s world of financial research, where an author from the USA can conduct research with sample data from an Asian country—and vice versa. The benefits of this exploration are twofold. First, it demonstrates where the field stands in terms of both geographical and methodological concentration, potentially identifying gaps in the literature for future research to address. Second, new scholars will find it helpful to discover the dominant methodologies and their temporal trends, as this will equip them with knowledge of which methodologies they may utilize in their future research. This, in turn, will help new scholars find their footing in the field. Consequently, we present the following research questions:

RQ4. On which geographical regions have scholars focused in the fields of venture capital and private equity research, and which geographical regions have scholars ignored?

RQ5. What are the dominant methodologies in the fields of venture capital and private equity research?

The third and final objective of this study is to present a science mapping (Cobo et al., 2011 ; Donthu et al., 2021 ) of venture capital and private equity research, including the analysis of collaboration patterns, research themes, and trends. The study of collaboration in a field can be extremely helpful in understanding its research (Crane, 1969 ) because the social structures created by collaborations are important to the field’s development. For example, group A may be pursuing a different subarea of venture capital or private equity research than group B. It is then interesting to analyze how both groups interact with one another, as well as which group is more dominant and prolific in the field. Indeed, this analysis indicates the emergence, decline, and interaction between different subareas of research. Apart from collaboration patterns, this study also focuses on thematic analysis, which is perhaps the most important part of any review because it focuses on the content of the studies themselves. By finding different thematic clusters—in both the entire field and the research published more recently (Andersen, 2019 )—this study will provide the foundational themes in the fields’ research, their development over time, and propositions for future research. We thus present the final two research questions:

RQ6. What are the collaboration patterns in the fields of venture capital and private equity research?

RQ7. What are the foundational themes in the fields of venture capital and private equity research, and what are the ways forward for the fields?

The rest of the article is organized as follows. Section 2 presents an overview of the bibliometric methodology. Subsequently, Sect. 3 presents the results of the performance analysis of venture capital and private equity research using the above-mentioned research questions. The thematic analysis for venture capital and private equity is conducted in Sects. 4 and 5, respectively. Finally, we conclude the study in Sect. 6.

2 Methodology

To delve more deeply into the growing literature on venture capital and private equity research, this study combined systematic literature review (SLR) (Tranfield et al., 2003 ) and bibliometric analysis (Donthu et al., 2021 ). The former introduces a method of review that is transparent, replicable, and more authentic. However, the qualitative nature of SLR may be a drawback because qualitative reviews often suffer from interpretation bias (MacCoun, 1998 ). Interpretation bias, for its part, implies that the interpretation of any work is dependent upon a given scholar’s background. Another drawback is that large works cannot be reviewed qualitatively. We used bibliometric analysis to present a solution to such drawbacks. First, the quantitative nature of bibliometric analysis can help minimize interpretation bias. Second, bibliometric analysis can be used with large works (Ramos-Rodrígue & Ruíz-Navarro, 2004 ). We follow the guidelines of Mukherjee et al., 2022 in applying bibliometric method. Table 1 presents the mapping of the research objectives and the tools that we used to achieve them.

Using multiple rounds of filtering, we used the SLR methodology to find potentially relevant literature from the keyword search. For both venture capital and private equity, we used the Web of Science database. After the keyword search (i.e., “private equity” for private equity research and “venture capital” for venture capital research), we found several studies in both areas. In order to enable a focused review of the state of research in both fields, the publications appearing in the private equity dataset were removed from venture capital dataset. Subsequently, we refined the results to the relevant Web of Science categories, such as business finance, business, management, and economics, resulting in 1550 documents for the venture capital corpus and 941 documents for the private equity corpus.

Since the article search was conducted on the Web of Science, an article’s inclusion or exclusion is subject to two main conditions. First , the article must be published after 2000 and should be a part of the Web of Science Core Collection. Second , the article must have either “private equity” (for inclusion in private equity dataset) or “venture capital” (for inclusion in venture capital dataset) in at least one of four fields: “title,” “abstract,” “author keywords,” and “KeywordPlus” (i.e., keywords assigned by the Web of Science). Bibliometric studies such as the present study typically rely on bibliographic data from the scientific database, and thus, any errors in the database could affect the dataset for the study. Despite the potential of errors, the impact of such errors is likely to be negligible because (1) the authors did a follow-up to carefully check and correct for recognizable errors (e.g., missing data—e.g., author name), and (2) the corpus for the study is large enough for major themes to emerge. In the Appendix, we explain the choice of the sample period from 2001 to 2021.

We then conducted an analysis of the literature using a range of bibliometric analysis tools to achieve our research objectives. To conduct a performance analysis of the field, we used citations and publications as measures of influence and productivity (Ding et al., 2009 ).

For our second research objective, the articles were classified on the basis of their research approach (i.e., empirical, conceptual, modeling and analytical, review, or mixed) and design (i.e., quantitative, qualitative, or mixed) (Baker et al., 2020 ). We further classified the articles according to the source of their sample (i.e., archival, survey, case study, interview, experimental, or field).

For our final research objective, we used investigative tools such as co-authorship analysis (Acedo et al., 2006 ), co-citation analysis (Hota et al., 2019 ; Samiee & Chabowski, 2012 ; Xu et al., 2018 ), and bibliographic coupling (Baker et al., 2020 ). The large size of the literature required us to find content markers. In the case of co-authorship, the content markers were the authors themselves. However, in the case of co-citation analysis and bibliographic coupling, the content markers were references. Notably, for co-citation analysis, articles share a thematic similarity when they are frequently cited together (Small, 1973 ). The study of such works using co-citation is instrumental in identifying the development of paradigms in a subject field. The development of paradigms is further an indication of ideological consensus among scholars (Culnan et al., 1990 ). Thus, the study of cited references is instrumental in understanding the themes which are widely upon by scholars. For bibliographic coupling, articles generally share literature references (Weinberg, 1974 ). These thematic similarities were then used to create clusters of articles and determine the key themes of research in both fields.

For the purpose of conducting co-authorship analysis, co-citation analysis, and bibliographic coupling, we used different software packages, including VOSviewer (van Eck & Waltman, 2010 ) for science mapping and Gephi (Bastian et al., 2009 ) for network visualization.

3 Performance of analysis of venture capital and private equity research

To achieve our objectives and conduct a performance analysis of the field, we presented three research questions. The answers to these questions, in turn, revealed which subareas of the field have grown and which have not. Our first research question deals with publication patterns in the field of venture capital and private equity research. To achieve our first research objective, we conducted a performance analysis of venture capital and private equity research.

The solid line in Fig. 1 presents the publication trend for venture capital research. The publication trend (RQ1) suggests that the field’s research has grown organically over the years. In other words, research in the field does not seem to be spurred by any externality or event, with more than 30 publications each year. Whereas, the dotted line in Fig. 1 shows that public equity research has grown consistently since 2001. The growth here is evident; since 2012, on average, more than 60 private equity studies have been published. Interestingly, more private equity studies appear to have been published after 2008. The focus on alternative sources of financing (other than IPOs or bank loans) may have influenced this increased interest in private equity research subsequent to 2008, which was the year that the global financial crisis affected many firms.

Year-wise publications for venture capital and private equity research. Note: Publications included in 2021 are available in WoS up to October 2021

Figure 2 shows the trend of citations for both venture capital and private equity research in the review corpus. The citations for both fields were zero in 2001, which is expected since the dataset begins in that year. Nevertheless, the citations for both fields have grown over the years, with venture capital research achieving almost 8000 citations while private equity research receiving nearly 4000 citations in 2021.

Year-wise citations for venture capital and private equity research. Note : Citations are based on publications in WoS up to October 2021

Table 2 presents the list of the most prolific authors for venture capital and private equity research (RQ2). In the case of venture capital research, the most prolific researcher in the field is Douglas Cumming, who has 28 publications, followed by Mike Wright with 25 publications and Colin Mason with 17 publications. Mike Wright is also the most impactful author who has attracted 1823 citations for his research on venture capital, followed by Thomas Hellmann with 1594 citations and Douglas Cumming with 1,531 citations. In the case of private equity research, Mike Wright emerges as the most prolific author, with 50 publications, followed by Douglas Cumming, who has 47 publications and Sofia Johan with 20 publications. In terms of citations, Douglas Cumming is the leader (2271), followed by Mike Wright (1563) and Steven A. Kaplan (1407).

Table 3 shows the most prolific sources for venture capital and private equity research (RQ2). In terms of venture capital research, Journal of Business Venturing , which hosts 85 publications, is the most prolific source for research in the field, followed by Small Business Economics with 69 publications. In terms of impact, the most impactful journal is Journal of Finance , which has amassed 2976 citations for research on venture capital, followed by Journal of Business Venturing with 2694 citations. In terms of private equity research, Journal of Corporate Finance has the most publications, followed by Journal of Financial Economics . Between 2001 and 2021, both journals published more than 50 articles each on private equity. Finally, in terms of citations calculated based on the citations received from within our dataset, Journal of Finance has been cited the greatest number of times (1611), followed by Journal of Financial Economics (1591) and Review of Financial Studies (584), respectively.

Table 4 shows the list of the most cited articles on venture capital and private equity research (RQ3). In terms of venture capital research, the most cited article in the field is Lee et al., ( 2001 ) article on technology-based ventures, which has been cited 982 times. This is followed by Hellmann and Puri’s ( 2002 ) article on the role of venture capital in the professionalization of startups, which has been cited 798 times. The third most cited article is Pittaway et al.’s ( 2004 ) article on relationship between networking and innovation, wherein venture capital is discussed as a network partner having influence over innovation. This article has been cited 773 times. In terms of private equity research, Kaplan and Schoar’s ( 2005 ) study on private equity return is the most cited article, with 590 citations, followed by Moskowitz and Vissing-Jørgensen’s ( 2002 ) study on entrepreneurial finance (380 citations) and Kaplan and Strömberg’s ( 2009 ) study on leveraged buyouts (301 citations), respectively. The table also suggests that finance journals publish the most impactful studies in the field.

Figure 3 shows the citation network for journals hosting venture capital and private equity research. In the case of venture capital research, we find a denser network, with journals showing a much closer connectivity with one another. One striking feature in this network is the strong citation bonds shared by finance (e.g., Journal of Finance ), management (e.g., Organization Science , Strategic Management Journal ), and entrepreneurship (arguably a subset of management journals—e.g., Research Policy , Journal of Business Venturing ) journals. The clusters in this network are largely representative of the area. The ones in purple in this network are finance journals, whereas the ones in blue and green are management and entrepreneurship journals, respectively. However, the network for private equity research is quite different. In this network, the journals from the same area do not share strong bonds. The finance journals, which are dominant in this field, share strong citation links amongst themselves. The “top three” finance journals—i.e., Journal of Finance , Journal of Financial Economics , and Review of Financial Studies —cite one another quite often, and less often than other journals. Journal of Corporate Finance is prominent in this network, citing the “top three” finance journals quite often. In this network, we did not find many strong links between finance and non-finance journals, which is consistent with Cumming and Johan ( 2017 ). Noteworthily, the citations of private equity research are highly focused on finance, which contrasts against the management and entrepreneurship citation patterns witnessed in venture capital research, where management and entrepreneurship journals share strong citation bonds, albeit not nearly as strong as the citations for journals within their own discipline.

Citation network of journals for venture capital and private equity research. A Citation network of journals for venture capital research. B Citation network of journals for private equity research

Figure 4 shows the citation network of authors publishing on venture capital and private equity. In this case, the networks for both fields are quite similar, where it is observable that authors who work together also have strong citation ties. In the case of venture capital research, examples include Mike Wright, Andy Lockett, Sophie Manigart, Harry Sapienza, and Mirjam Knockaert, whereas, in the case of private equity research, examples include Steven Kaplan, Berk Sensoy, Tim Jenkinson, David Robinson, and Michael Weisbach. This observation could be explained by the possibility that authors form citations links with co-authors from their research group as well as current and former Ph.D. students. Cumming and Johan ( 2017 ) discuss a variety of other behaviors that may drive citation patterns in the literature and the choices authors make to submit their work to finance versus management and entrepreneurship journals.

Citation network of authors in venture capital and private equity research. A Citation network of authors in venture capital research. B Citation network of authors in private equity research

4 Thematic analysis of venture capital research

4.1 geographical focus and methodological choice analysis.

To achieve our second research objective, we conducted a geographical focus and methodological choice analysis. Table 5 shows a summary of the geographical focus of the research conducted in the field of venture capital (RQ4). The studies on venture capital have focused primarily on a single country, whose share has gone from 42.41% between 2001 and 2006 to 48.83% between 2017 and 2021. The proportion of studies with multi-country samples has also grown from 22.57% between 2001 and 2006 to 32.97% between 2017 and 2021. In terms of studies focusing on only a single country, the USA has emerged as the most popular country for study among venture capital researchers. Nonetheless, the share of studies on China has also increased over time. Yet, most studies in the field remain predominantly focused on the west, with America and Europe garnering the most attention among researchers, though the shares of Asian and African countries have also risen over the years.

Table 6 shows the trend of methodological choices of venture capital researchers (RQ5). Panel A indicates that most studies in the field are empirical in nature, with its share growing from 61.09% between 2001 and 2006 to 79.10% between 2017 and 2021. Panel B suggests that studies in the field are mostly quantitative, with the share of qualitative studies declining over time. The data used in such studies tend to be archival in nature, with other data types having a small share as per Panel C. Taken collectively, venture capital researchers appear to favor a slant towards empirical, quantitative, and archival research.

5 Science mapping

5.1 co-authorship analysis.

As part of our endeavor to achieve our third research objective, we conducted a co-authorship analysis (RQ6). Using this method, we identify several major author groups who have contributed and shaped the field of venture capital. The network of co-authorship is constructed for authors who have contributed at least five publications in the field. The analysis resulted in numerous clusters, wherein only eight clusters had three or more authors—we focus on these major clusters in this study. Figure 5 presents the collaboration network of authors while the summary of author groups is presented in Table 7 .

Co-authorship network of venture capital researchers

5.2 Author group #1: Maula et al.

The largest author group consisting of eight authors is led by Markku V. J. Maula, who has the highest total link strength. Geographically, the concentration of these authors has been predominantly in China and the USA, with the thematic focus being on venture capital networks and portfolios. The authors have also worked on institutional research across multiple countries. The average publication year of this author group is 2012, with the publications by Yunbi An being the most recent at an average publication year of 2018.

5.3 Author group #2: Khurshed et al.

The second largest author group containing seven authors is led by Arif Khurshed, who has the highest total link strength. Geographically, these authors focus on multi-country studies, with a predominant focus on Europe. Thematically, venture capital syndication and initial public offerings are some of the noteworthy contributions by this author group.

5.4 Author group #3: Colombo et al.

The joint third-largest author group, which consists of six authors, is led by Massimo Colombo. The average publication year of this author group is 2015, indicating that the publications from this author group appear around the same time as the second largest author group, whose average publication year is also 2015. Both the second and third largest author groups are much ‘younger’ than the largest author group. Thematically, the authors in this group have focused on venture capital growth and performance, whereas geographically, the group seems to have a European focus, with particular interest on Italy.

5.5 Author group #4: Cumming et al.

The next joint third-largest author group, which also consists of six authors, is led by Douglas Cumming. The thematic focus of this author group has been on entrepreneurial finance while their geographic interest has been multi-country in Europe. The average publication year of this author group is 2012. This represents a potential timeline for the emergence of entrepreneurial finance research in Europe.

5.6 Author group #5: Wright et al.

This author group, though consisting of only four authors, is arguably the most important author group for venture capital research. This assertion is predicated on the prominence of this author group in the collaboration network (Fig. 2 ) and the prolific publication of all four authors in this author group, all of whom appear in the list of the top most prolific authors (Table 2 ). Furthermore, the connection between these authors is notably strong, indicating their repeated collaborations with one another. Their thematic range is also wide, with a generous focus on topics such as venture capital syndication, university spinouts, and decision-making in venture capital. The geographical focus of this author group is on Europe, with the UK receiving much attention. However, the average publication years of these authors range between 2005 and 2009, which indicates that these authors are less prolific in recent times. However, the works of these four authors remain significant in the field.

One of the main authors in this group, Mike Wright, passed away in 2019. This is a big loss to the academic community, as Mike Wright was most cited in both venture capital and private equity on Google Scholar (see Appendix). Mike Wright also established the Centre for Management Buyout Research at the University of Nottingham in 1986, which offers a leading source of data and information on buyouts as well as venture capital, with a focus on Europe. The British Journal of Management ( BJM ) advertised a call for papers to honor Mike Wright’s contributions to entrepreneurial finance shortly after his passing in 2019. BJM published this special issue on entrepreneurial finance in Mike Wright’s honor in 2022 (Budhwar et al., 2022 ).

5.7 Author group #6: Sapienza et al.

This author group is another one that is “older,” with its authors’ average publication years falling between 2006 and 2009. The group is led by Harry J. Sapienza and the thematic focus of the group has been on the determinants of venture capital investments. Geographically, this author group has a multi-country focus on Europe and the USA.

5.8 Author group #7: Hsu et al.

The author group, which is smaller than the other author groups, is led by David H. Hsu. Thematically, the focus of this author group is on entrepreneurial finance, whereas geographically, their focus is predominantly on the USA. The average publication years of the authors in this group range between 2008 and 2013, making this cluster ‘older’ than the fourth author group. This could indicate that entrepreneurial finance research in the USA emerged earlier than that in Europe. However, more research is required to bolster this assertion.

5.9 Author group #8: Manigart et al.

This author group is another one of the ‘younger’ author groups, with average publication years ranging between 2010 and 2016. The group is led by Sophie Manigart. Thematically, this author group concentrates on venture capital investment decisions. Geographically, the research of this author group tends to be multi-country in Europe.

5.9.1 Co-citation analysis

To find the foundational themes in venture capital research (RQ7), we use co-citation analysis. The co-citation analysis has been established as a valid means of study in a scientific discipline and is instrumental in identifying the intellectual structure of a field (Ramos-Rodrígue & Ruíz-Navarro, 2004 ). The premise here is that authors often draw from each other’s works in addition to drawing from common sources of knowledge (Nerur et al., 2008 ). The citation is often a form of intellectual dependence (Culnan, 1987 ), where one work draws build upon the knowledge created in the works that came before. The co-citation of two papers occurs when they are cited together in a third document, indicating intellectual similarity (Small, 1973 ). The co-citation thus focuses on the works that are cited in the paper, rather than the paper itself. Here, the co-citation analysis of the most cited references by venture capital research revealed 422 articles that can be segmented into five clusters, with each cluster representing a foundational theme in the field of venture capital. The analysis is based on local citations (i.e., the number of times a reference appears in the reference list of the articles in the corpus), which indicate the impact of any reference on venture capital research in the corpus. Table 8 presents the summary of the foundational themes in venture capital research.

5.10 Theme #1: Venture capital adoption and financing processes

This is the largest cluster formed with 122 cited references. The central theme of this cluster is the adoption and financing process of venture capital, with topics such as the venture capital cycle, the effect of venture capital on the performance of entrepreneurial ventures, the strategy in business backed by venture capital, as well as the institutional factors affecting them. This cluster also highlights the impact of venture capital on firms. Authors such as Gompers and Lerner ( 1999 ) present a comprehensive overview of the venture capital cycle, whereas Sorenson and Stuart ( 2001 ) reveal the effect of the interfirm network on shaping venture capital investments, and Stuart et al., ( 1999 ) show the effect of interorganizational networks on firm performance. Noteworthily, the contributions of these authors inherently concentrate on the adoption of venture capital, with the authors exploring “how” such investments take place and impact firms, thereby contributing to the field’s foundational understanding. Other firm-level characteristics such as absorptive capacity (Cohen & Levinthal, 1990 ), competitive advantage (Barney, 1991 ), corporate alliance (Dushnitsky & Lavie, 2010 ), innovation (Dushnitsky & Lenox, 2005a , 2005b ), and knowledge management (Dushnitsky & Shaver, 2009 ; Wadhwa & Kotha, 2006 ), as well as institutional influences (Guler, 2007 ), also receive attention in this cluster.

5.11 Theme #2: Venture capital roles in business

The central theme of the second largest cluster concentrates on venture capital itself, specifically on the roles of venture capital in business. As one of the primary sources of financing and leverage for startups, early-stage, and emerging companies that have high growth potential, the value that venture capitalists contribute, both monetarily and non-monetary, is important. While public organizations receive scrutiny from regulators and the public, the same cannot be said about other firms, especially newer firms, and thus, venture capital investors can serve the same purpose through the governance of newer firms, which highlights the added value that venture capital investors can bring through advisory and monitoring. This is in addition to the experience and leverage that venture capital can offer to firms that receive their investment. These key roles are exemplified through the studies in this cluster, which have explored the roles of venture capital in business (Gorman & Sahlman, 1989 ; Sapienza et al., 1996 ), and the value added to firms as a result of the involvement of venture capital investors in firms (Baum & Silverman, 2004 ; Hsu, 2004 ; Sapienza, 1992 ). The understanding of the role that venture capital can play in business has also been studied in tandem with the determinants of venture capital investments (Gupta & Sapienza, 1992 ), the decision-making process in venture capital investments (Macmillan et al., 1985 , 1989 ), the modelling of venturing capital decision making (Tyebjee & Bruno, 1984 ), and role of government venture capital on young and innovative firms (Colombo et al., 2016 ).

5.12 Theme #3: Venture capital governance

The third largest cluster deals with a foundational theme on venture capital governance. The studies in this cluster demonstrate that governance is important to both venture capital firms and the firms that receive venture capital investment. Though the contribution of the present cluster appears to overlap with the previous cluster, a noteworthy observation is that this cluster devotes itself to the manifestation of governance in venture capital, whereas the previous cluster is broader and includes the multiple roles that venture capital can play in business, wherein governance plays a peripheral (i.e., topic) rather than a central (i.e., theme) role. Sahlman ( 1990 ) describes the structure and governance of venture capital firms, whereas Gompers ( 1995 ) explores the optimal investment, monitoring, and staging of venture capital. Other scholars such as Hellmann and Puri ( 2002 ) concentrate on venture capital firms in relation to the development and professionalization of new firms, whereas Kaplan and Stromberg ( 2003 ) and Cumming and Johan ( 2013 ) focus on venture capital contracts, and Lerner ( 1995 ) on the effect of venture capital investors on firm oversight. Other studied topics include the role of venture capital in firm innovation (Kortum & Lerner, 2000 ), structure of capital markets (Black & Gilson, 1998 ), and private equity performance (S. N. Kaplan & Schoar, 2005 ).

5.13 Theme #4: Venture capital syndication

This second smallest cluster deals with the theme on venture capital syndication, including its alliances and networks. The studies in this cluster have focused on explaining the structure, innerworkings, and impact of venture capital networks. Hochberg et al., ( 2007 ) argue that whom you know matters in their exploration of the relationship between venture capital networks and investment performance, whereas Lerner ( 1994 ) and Brander et al., ( 2002 ) shed light on the syndication of venture capital investments and its impact on added value and venture selection. Other studies reveal the factors influencing the formation of venture capital alliances (Bygrave, 1987 ) and the structure and management of such alliances (Wright & Lockett, 2003 ). Their findings suggest that venture capital investments are primarily driven by the potential and volatility of returns, which motivate venture capital firms to diversify risk by way of syndicated and joint investments, highlighting the importance of the management of such networks in the process. Also discussed in this cluster is the specialization and diversification of venture capital funds (Norton & Tenenbaum, 1993 ). Noteworthily, the study of structures of venture capital, including its syndication, is highly important to gain a comprehensive understanding of the venture capital industry and its inherent decision-making processes. Therefore, this foundational theme, despite being relatively small in its publications, remains central to the understanding of venture capital investments.

5.14 Theme #5: Venture capital and creation of public organizations

The fifth and final foundational theme deals with the role of venture capital investors in the creation of public organizations. The studies in this cluster concentrate on the certification role of venture capital investors in IPOs (Barry et al., 1990 ; Megginson & Weiss, 1991 ) and the development of venture capital firms (P. A. Gompers, 1996 ) and their reputation (Nahata, 2008 ). The effect of venture capital investors on firm funding and IPOs has been explored at length in this cluster. Nonetheless, this is the smallest cluster, which indicates that this foundational theme has received lesser attention as compared to the other foundational themes. The publication year of the references constituting this cluster averages at 1995, which indicates that this foundational theme serves as the basis for much of the discussion in venture capital research. In comparison, the average publication years of the references constituting the first, second, third, and fourth clusters are 1998, 2000, 2003, and 2004, respectively, indicating that the fifth cluster is the oldest cluster among the foundational clusters of venture capital research.

5.14.1 Emergent research frontiers in venture capital research

In order to locate the emerging themes in venture capital research (RQ7), we use bibliographic coupling. The application of bibliographic coupling on the articles published in the last three years at the time this review was conducted (2019–2021) led to the creation of several clusters, wherein seven were major clusters as they covered approximately 97% of the total publications on venture capital during the studied period (361 out of 374). These clusters represent the major frontiers of the field as they have been explored most prominently and recently by researchers. The clusters are also ordered from the largest to the smallest in terms of total publications and reviewed to define their central themes. Noteworthily, there is connectivity across themes, which is reasonably expected as they belong to the same field of research. In this regard, a theme could be tangentially discussed in tandem with another theme. Therefore, the connected nature of research in the field should be taken into account when interpreting the nuances and trajectory of venture capital research. Table 9 presents a summary of the emergent frontiers in the field.

5.15 Frontier #1: Venture capital and sustainable entrepreneurship

The largest frontier concentrates on sustainable entrepreneurship. The authors contributing to research in this frontier have explored venture capital in tandem with the role of institutions in fostering entrepreneurship quality (Chowdhury et al., 2019 ), gender gaps in entrepreneurship (Guzman & Kacperczyk, 2019 ), IPOs (Howell et al., 2020 ), eco-innovation and firm growth in the circular economy (Demirel & Danisman, 2019 ), the financial development of startup cities (F. Pan & Yang, 2019 ), and the role of environmental policies in spurring venture capital (Bianchini & Croce, 2022 ). This frontier appears to be motivated in part by the United Nations Sustainable Development Goals, which have led to governments around the world striving to follow the path of sustainable development, thereby formulating and implementing policies targeted at achieving economically, environmentally, and socially responsible development. This seems to have affected venture capital investment and enterprise selection, and thus this theme’s development. Noteworthily, there is a strong sense of economically, environmentally, and socially conscious entrepreneurship spearheaded by venture capital-backed sustainable enterprises. This emerging interest lays a path forward for the future, with calls for new research relating to the following research questions:

How can venture capitalists select or nurture economically, environmentally, and socially conscious enterprises?

How can venture capitalists and their investments contribute to the sustainable development goals?

5.16 Frontier #2: Fintech and crowdfunding

The second largest frontier deals with fintech and crowdfunding, with authors exploring topics related to the emergence of fintech (Haddad & Hornuf, 2019 ), crowdfunding (Brown et al., 2019a , 2019b , 2020 ; Cumming et al., 2019a , 2019b , 2019c , 2021a , 2021b ; Johan & Zhang, 2021b ; Vismara, 2019 ), and blockchain (or the technology empowering fintech and crowdfunding) (Ahluwalia et al., 2020 ). Apart from this, other studies have also shed light on digital entrepreneurship (Cavallo et al., 2019 ) and technology parks (Cumming & Zhang, 2019 ; Robinson, 2022 ), including their role in the development of new-age financing. There has also been a focus on sustainability (Vismara, 2019 ), and separation of ownership and control (Cumming et al., 2019a , 2019b , 2019c ) in relation to their effects on the success or failure of crowdfunding campaigns. Noteworthily, authors are investing their focus on the more ‘democratized’ ways of financing such as crowdfunding and initial coin offerings (Cumming et al., 2021a , 2021b ), which have become increasingly popular with time (Butticè & Vismara, 2022 ). Specifically, the upheavals in the financial world due to successive crisis (e.g., economic, public health—e.g., COVID-19) and the emergence of new business models driven by the fourth industrial revolution (e.g., blockchain, internet of things) have led to a shift in all aspect of conducting business including the way they are financed. With information and innovation being democratized due to the internet and with digital communities having a great influence over the flow the knowledge today than in the past, it is expected that the financing of business too will change and therefore the topics of fintech and internet-based funding such as crowdfunding seem to have emerged to transplant, in some part at least, the traditional sources of financing. This seems to be the reason why research in this area has emerged and proliferated in recent times, and thus, holds the potential for leading a way to the future for more research on the democratized ways of financing and the changes in financing models that have been influenced by contemporary changes over time.

How does changes in the technological environment affect the changes in business models and the source of financing options available to firms?

How can firms access to democratized ways of technology-enabled financing, and what can they look forward to (e.g., opportunities) and should look out for (e.g., pitfalls) in a democratized financial market empowered by technology?

What are the antecedents and consequences of contemporary and democratized financing for both investors and investments, and what are its similarities and differences as compared to traditional financing?

5.17 Frontier #3: Venture capital investment strategies

The third largest frontier focuses on investment strategies in the field of venture capital. The authors contributing to this frontier concentrate on venture capital endorsements (Gomulya et al., 2019 ), new trends in entrepreneurship (e.g., immigrant entrepreneurship) (Nazareno et al., 2019 ), syndication of angel investments (J. H. Block et al., 2019a , 2019b ), the effect of financial constraints on investment strategies (Conti et al., 2019 ), and the factors influencing venture capital roles in the board of companies (Amornsiripanitch et al., 2019 ). They also explore the investment strategies adopted by venture capital including syndication (Luo et al., 2019 ), and partner selection (Cheng & Tang, 2019 ), as well as the effect of venture capital on firm outcomes such as innovation (Que & Zhang, 2020 ) and reputation (Chahine et al., 2021a , 2021b ). The effect of venture capital investors on firms is one of the foundational themes in the field, and its continuation in recent times reflects the importance of this theme. The field has nonetheless gone beyond financial performance as it now includes the non-financial performance of firms. This indicates a shift in the thinking of researchers who no longer look at firm performance the same way they used to in earlier times. This raises several potentially interesting and fruitful research questions for future research:

What non-financial aspects in a firm do venture capital investors find attractive, may consider, or will look for when making funding and investment decisions?

How do venture capital investors evaluate a firm’s ability to achieve non-financial objectives, and how are they similar or different to that for financial objectives?

How can firms seeking venture capital funding and investment leverage on new-age practices (e.g., ESG) and technologies (e.g., big data analytics) and innovate to deliver on both financial and non-financial aspects of performance expected by investors?

5.18 Frontier #4: Venture capital and innovation

The fourth largest research frontier is dedicated to entrepreneurial ventures and innovation. The topics explored as part of this frontier include the innovation strategy of firms (Guo et al., 2019 ), the technologies that drive collaboration among firms (Kim et al., 2019 ), the entrepreneurial and linguistic strategies that firms rely upon to deal with venture capital investors (L. Pan et al., 2019 ), and the roles of venture capital in the development of disruptive technologies (Rossi et al., 2020 ). The innovations by new firms are usually framed as new opportunities for venture capital investors. By investing in innovative firms, venture capital investors get more opportunities for higher returns, while firms secure the funding they need to develop and market their innovations. While the theme of the present frontier is related to the theme of the previous frontier, it should be noted that innovation takes center stage here as compared to its peripheral role in the other frontier. Nonetheless, new research in this space remains necessary in tandem with today’s marketplace characterized by high competition and rapid technological advancement. Thus, future research is encouraged, as follows:

What do venture capital investors consider ‘innovative’, and what cues of innovation do they look for in firms when making funding and investment decisions?

How do venture capital investment returns differ across the various forms of innovation (e.g., incremental, new to the word), and to what extent do factors such as technology influence investment performance and returns?

5.19 Frontier #5: Entrepreneurial finance

The fifth largest research frontier concentrates on entrepreneurial finance. The topics explored as part of this frontier include the role of geographical distance between venture capital and entrepreneurs seeking external financing (Colombo et al., 2019 ), the valuation of venture capital investments in entrepreneurial ventures (Gornall & Strebulaev, 2020 ), the outcomes of investments for entrepreneurs and venture capital under the crowdfunding model (Babich et al., 2020 ), the role of venture capital in financing entrepreneurial innovations (Lerner & Nanda, 2020 ), and venture capital certification (Wu & Xu, 2020 ). Noteworthily, this research frontier highlights the importance of acknowledging and understanding new methods of entrepreneurial finance (Block et al., 2018 ). Specifically, research in this frontier not only focuses on funding by venture capital investors but also on their role in the firm acquisition of bank lending. However, much of the current research in this frontier is economic-focused, with little insight into the psychological process behind funding decisions for entrepreneurial ventures. In other words, current research is largely based on the assumption that venture capital investors are rational beings with all their investments thoughtfully planned, which ignores the irrational and speculative behavior exhibited by investors in the real world. Moving forward, we encourage researchers to explore the role of psychological processes and impulsive investment decisions, and to analyze how such investments turn out. Thus, the following research questions are proposed:

What is the psychological process that underpins the decision-making of venture capital investors, and how does this process differ and interact with the rational process?

How does irrational/impulsive decision-making of venture capital investors affect the returns of the entrepreneurial ventures that they invest in, and to what extent do they differ from rational/planned decision-making?

5.20 Frontier #6: Venture capital and IPOs

The sixth largest research frontier deals with venture capital and IPOs, specifically the risk associated with IPOs and the impact of venture capital on IPO outcomes. The authors of this frontier have focused on topics such as financial distress (Megginson et al., 2019 ), IPO underpricing (Sakawa & Watanabel, 2020 ), factors affecting IPO value (Chahine et al., 2019 ), and trading advantages of IPOs (Ozmel et al., 2019 ). Noteworthily, this frontier highlights that venture capital backing and certification play a significant role in IPO performance. Future research on venture capital can take inspiration from this frontier and extend insights into this space through new explorations on the mechanisms through which venture capital affect IPO outcomes.

What mechanisms can venture capital leverage to influence IPO performance?

What venture capital contractual terms influence the performance of a venture and enable a firm to go public?

To what extent can venture capital influence IPO performance across different economic conditions (e.g., financial distress)?

Why are venture capitalists better able to bring investee companies to IPOs in some countries than others?

5.21 Frontier #7: Drivers of venture capital funding decisions

The final research frontier is the smallest and deals with venture capital funding decisions and the drivers of such decisions. The exploration of topics in this frontier has been on the influence of geographical distance and technological performance (Tian et al., 2020 ), linguistic preferences (Gou et al., 2019 ), regret (Liu et al., 2020 ), technology spillovers (Zhang et al., 2020 ), and technological change (de Leeuw et al., 2019 ) on venture capital funding decisions. While decision-making models have been discussed in previous research frontiers and themes, the studies here are dedicated to decision-making from the venture capital investor perspective. Another difference is the discussion of decision-making models herein from the behavioral perspective with linguistic preferences and group decision-making gaining prominence. Nonetheless, the small size of this frontier indicates that research in this area is less developed. Thus, the following research questions are proposed to stimulate new research in this space:

How do the behavioral and psychological profiles of venture capital investors affect their funding decisions?

How do disruptive changes, externalities, and social sentiments affect funding decisions among venture capital investors?

How do funding decisions differ among venture capital investors of different generations?

Why is there performance persistence across different venture capital fund managers?

6 Thematic analysis of private equity research

6.1 geographical focus and methodological choice analysis.

To answer our fourth research question (RQ4), Table 10 presents an analysis of the geographical focus of private equity research. A plurality of the research in the field has been focused on single countries, which forms around 40% of all research. The multi-country studies are not far behind, though, comprising 33% of private equity studies. There has been an increase in the number of both single-country and multi-country studies throughout the period. Notably, studies that do not have a geographical focus (i.e., conceptual and review studies) have become less pronounced over time. Most single-country studies focus on the USA, followed by the UK. The share of studies focusing on the UK has decreased over time, however, and an increasing number of studies now focus on China. This indicates that in current research, scholars consider the institutional contexts of the USA and China to be more important. This may be because the USA and China are the two largest economies in the world. Furthermore, the USA and China also represent opposite sides of the spectrum of state control over industry. This reality may have motivated scholars to focus on these two countries. However, in general, the private equity field seems to have ignored other institutional contexts. In the future, authors should focus on the less explored institutional contexts of Africa, the Middle East, South Asia, and Latin America.

For our fifth research question (RQ5), we present an analysis of dominant methodologies that are employed in private equity research. We find that empirical methods have dominated the private equity field. Indeed, for research designs, scholars prefer quantitative methods (Table 11 ), and they also prominently use archival data. This is not surprising because research in the field primarily focuses on firm financing, which usually involves sourcing data and using empirical-quantitative research designs to establish causal relationships. It is important to note that other research designs have received some attention. However, more case studies and field studies can be conducted to grasp the mechanisms of private equity in a more real-world environment by focusing on the companies that employ them. Recent scholarship has also shown the advantage of using mixed methods in venture capital and private equity research (Levasseur et al., 2022 ). This will be useful for both finance researchers and students seeking to gain a better understanding of the subject.

7 Science mapping

7.1 co-authorship analysis.

To understand the research patterns in private equity research (RQ6), we present an analysis of co-authorship. This part of the analysis focuses on collaboration, with a particular focus on groups of authors who have produced works in the field. Since research is a collaborative endeavor, understanding the authors’ dynamics is important for learning how scholars conduct private equity research. We focused only on author groups with more than two authors which contain authors with 5 or more publications. Table 12 presents a summary of the author groups, while Fig. 6 presents the collaboration network.

Co-authorship network of private equity researchers

7.2 Author group #1: Croce et al.

This is the largest group author group, and the author most central to the network is Annalisa Croce; hence, the cluster has been named after her. This is a set of scholars who have emerged more recently, as 2016 is the average year of first publication for all the authors in the group. Within the larger research area of private equity, the main theoretical focus of these authors is on entrepreneurial finance. Also, they occasionally discuss academia-based startups and high-tech entrepreneurial firms. In more recent times the group has focused on the alternative financing sources such as Initial Coin Offerings and Crowdfunding campaigns with authors such as Silvio Vismara being leading contributors to the field. In terms of geographical focus, this group is more focused on multi-country research, with a specific focus on Europe.

7.3 Author group #2: Wright et al.

This is the second largest author group, with Mike Wright emerging as the most impactful author. In terms of the timing of their first publication, most of the authors in this group were first published around 2013, making their research slightly less recent than the first author group. Theoretically, this author group has mostly focused on venture capital and buyouts, ownership, and management in firms. These authors have also focused on publishing reviews and conceptual articles. The group’s empirical research focuses mostly on Europe—more specifically, the UK.

7.4 Author group #3: Filatotchev et al.

The third author group is led by Igor Filatotchev. These authors’ first studies were also published around 2013, making them peers of the second author group. In terms of research themes, this author group is more focused on the institutional aspects of private equity and entrepreneurial finance. Geographically, the focus has been on multi-country studies.

7.5 Author group #4: Sensoy et al.

This cluster’s average first publishing year is around 2016, meaning that the authors have published more recently. In terms of connectivity in the group, Berk A. Sensoy leads, and Michael Weisbach and Steven Kaplan are also in the group. Geographically, the authors focus more on the U.S. and are thematically oriented towards the workings of venture capital firms, as well as private equity performance and valuation.

7.6 Author group #5: Gottschalg et al.

Oliver Gottschalg is the most connected author in this group; however, Ludovic Phalippou is the most prolific. Thematically, the group’s focus seems to be on firm-level outcomes of private equity and buyouts. Geographically, the focus is multi-country. However, in terms of single-country research, the group focuses on the USA.

7.7 Author group #6: Cumming et al.

Douglas Cumming leads this author group. In terms of its size, the group is fairly small; however, it nevertheless generates a large number of papers relative to its larger counterparts. Cumming’s group also has strong connections to other groups. In terms of geographical focus, the author group focuses on international datasets, including but not limited to Europe. The thematic focus is similar to that of the first and second author groups, with a focus on venture capital, entrepreneurial finance, and corporate governance. The research choice is likely in part driven by the connection shared with these author groups.

7.8 Author group #7: Schwienbacher et al.

In terms of the number of authors, this cluster is fairly small. Armin Schwienbacher leads the group in terms of connectivity, including connectivity with author group #6; however, the other two authors are not far behind in terms of network connectivity. This is another international-focused group, with a thematic focus on the nuances of private equity investments.

7.8.1 Co-citation analysis

We used co-citation analysis to answer the first part of our seventh and final research question. Based on the co-citation analysis of the cited literature, we arrived at four foundational themes. These themes represent the theoretical foundation of private equity research. To determine the number of articles to include in this analysis, we used local citation (i.e., the number of times that articles cited a reference within the corpus of articles in this study). This led to 189 articles, which, after the co-citation analysis, were divided into four document clusters, each representing a theme. The clusters were ordered based on the number of articles in each cluster. Table 13 presents the summary of the themes using co-citation analysis.

Note that co-citation analysis gives rise to papers in Table 13 that are not private equity papers, such as Heckman’s and Myers and Majluf’s works. Those papers just happen to be papers that are most often cited in private equity papers.

7.9 Theme #1: Venture capital

This is the largest foundational theme, containing 89 literature references that focus on venture capital . Specifically, the theme here relates to venture capital and the performance of venture capital investments. The fact that venture capital is the largest foundational theme indicates its importance—especially because authors cover it from different aspects. This is unsurprising, as venture capital is one of the most popular methods by which businesses can receive private equity. Sahlman ( 1990 ) studies the structures of venture capital firms and their relationship with leveraged buyouts. Berger and Udell ( 1998 ) study the role of venture capital in the financial growth cycle of small firms. Other research under this theme focuses on the role of venture capital in startups (Hellmann & Puri, 2002 ), financial contracting (Admati & Pfleiderer, 1994 ; Cumming & Johan, 2013 ; Kaplan & Stromberg, 2003 ), venture capital cycle performance (Hochberg et al., 2007 ), capital market structures (Black & Gilson, 1998 ), disclosures by venture capital firms (D. Cumming & Walz, 2010 ; Johan & Zhang, 2021a ), and control and oversight by venture capital (P. A. Gompers, 1995 ; Lerner, 1995 ). The scholars in this area have also focused on the various aspects of venture capital, such as the outcomes of venture capital (i.e., investment performance), the process of venture capital (i.e., monitoring and contracting), the avenues of investment for venture capital (i.e., small businesses and startups), and institutional factors (i.e., capital market structure and law and economic systems). Primarily, the foundations of private equity research have focused on venture capital. Future research should focus on other sources of private equity, such as angel investors or crowdfunding (Vismara, 2016 ). While more recent research may extend to other sources of private equity, the foundations will remain in venture capital.

The overlap between venture capital and private equity explains a large part of this theme. Many private equity funds style drift into venture capital deals, and vice versa (Koenig & Burghof, 2022 ). For example, Cumming, Fleming, and Schwienbacher ( 2009 ) report that 35.5% of early-stage venture capital deals are done by late-stage private equity funds. And many research papers in the area of private equity comingle data on venture capital and private equity due to the frequent style drift and similarity in transactions and issues that arise.

7.10 Theme #2: Buyouts and privatization

The second foundational theme in private equity research is the process of privatization —more specifically, buyouts . Buyouts are a primary method of privatization, through which a firm can switch from a public corporation to private equity. The focus in the field has been on leveraged buyouts and management buyouts. The former contends with the acquisition of shares using borrowed funds (S. N. Kaplan & Strömberg, 2009 ), and the latter is about management buying shares of the companies it manages. The literature also points to the prevalence of agency theory in the literature, which theoretically focuses on the role of management. Some scholars predict that such takeovers are indicative of conflicts of interest between management and shareholders (Jensen, 1986 ). However, management buyouts have also been found to be associated with increased operational efficiency (S. Kaplan, 1989 ), and increased managerial discretion can benefit firm growth (Wright et al., 2000 ). The debate over the role of management thus forms one of the foundational topics in the research on buyouts. Other important topics are the outcomes of such buyouts and their effect on governance (D. Cumming et al., 2007 ) and productivity and efficiency (Harris et al., 2005 ; Lichtenberg & Siegel, 1990 ). While earlier research shows innovation improvements with private equity deals (Lerner et al., 2011 ), more recent work shows the exact opposite using the same empirical methods with more recent data (Cummings et al., 2020 ). In addition to the major topics discussed above, the other major topic is the process of buyouts. In this subarea, scholars focus on how leveraged buyouts are financed (Demiroglu & James, 2010 ) and what determines buyout activities (Opler & Titman, 1993 ).

7.11 Theme #3: Market mechanisms and venture capital-backed IPOs

The third foundational theme in private equity research focuses on market mechanisms and venture capital-backed IPOs . The discussions regarding market forces (Akerlof, 1970 )—especially information asymmetry (Leland & Pyle, 1977 ; Myers & Majluf, 1984 )—have been prevalent under this theme. It is noteworthy that this theme is about public corporations. More specifically, the cluster centers on the decision to go public and the role that different market forces play in this decision. Under this theme, researchers have discussed various topics relating to the nature of venture capital firms (P. A. Gompers, 1996 ) and their effect on a firm’s decision to go public (Barry et al., 1990 ; P. M. Lee & Wahal, 2004 ; Lerner, 1994 ). Importantly, researchers discuss the role of private equity on IPOs’ performance (Bruton et al., 2010 ). This sort of research represents an older stream of finance literature, which focused on IPOs while also presenting the roots of private equity research. In this stream of research, the roots of private equity research stemmed from research in public corporations and IPOs. As the previous two clusters show, the direction of research has shifted more towards privatization. This, in turn, presents an interesting insight into how the private equity field has developed over time.

7.12 Theme #4: Valuation and performance of private equity investments

Though this foundational theme is minor due to its relatively smaller size, it is also very interesting, as the average year of publication for the cited articles is around 2008. For context, the average publication years for the first three themes are 2001, 2002, and 1991, respectively. Thus, this foundational theme—while still important—developed more recently than the others. The discussions in the theme have revolved around the valuation and performance of private equity investments . Kaplan and Schoar’s ( 2005 ) study finds that the return on private equity investments grows differently from the one in mutual funds; indeed, the growth in the funds is contingent on the performance of the private equity partnership and the size of the fund. Metrick and Yasuda ( 2010 ) report that performance differs across types of funds, with buyout funds outperforming venture capital funds. Cumming and Walz ( 2010 ) first established (dating back to 2004 when the paper was first released as a working paper) that private equity funds misreport valuations to institutional investors, and those mis-valuations are correlated with proxies for information asymmetry based on national-level institutions and firm-specific and deal-specific characteristics. Smith et al. ( 2022 ) show that in the USA, the Freedom of Information Act plays a disciplinary role in mitigating private equity fund mis-valuations. Phalippou and Gottschalg ( 2009 ) find that the performance results are often biased towards the better performing funds, and funds’ underperformance increased when the researchers took risk into account. The results obtained by Gompers and Lerner ( 2000 ) show that the capital inflows into venture capital firms increase the valuation of their investments. The research in this theme has therefore focused on the performance of private equity funds, including the characteristics of private equity investment and whether private equity firms are determinants of performance.

7.12.1 Emergent research frontiers in private equity research

To answer the second part of our seventh and final research question (RQ7), Table 14 presents the summary of emergent research frontiers, along with potential future directions for research. In this section, we present the analysis of the articles published within the last three years at the time of writing (i.e., between 2019 and 2021). We used bibliographic coupling to create thematic clusters, each of which represents a research frontier on which authors have recently focused. These frontiers can be further developed. In the following discussion, we present an analysis of these research frontiers and suggest areas for future research.

7.13 Frontier #1: Private equity and strategy

Private equity and strategy represent the largest emergent research frontier in recent years. Though researchers discuss a range of topics in this front, such as ownership, mergers and acquisitions, and corporate governance, the primary focus in this cluster is on strategic management and its relationship with private equity. In this context, studies have focused on the role of private equity firms as monitors, as well as their role in the firms and economy at large (Aldatmaz & Brown, 2020 ). Bernstein et al. ( 2019 ) discuss private equity investments during financial crises, while Jelic et al. ( 2019 ) focus on the effects of private equity on management buyouts. Researchers also discuss other strategic decisions, such as takeover auctions (Gentry & Stroup, 2019 ) and hedge fund activism (Buchanan et al., 2020 ). More recently, the focus has been on human resource management—especially in the context of the COVID-19 pandemic (Collings et al., 2021 ) and workplace safety (Cohn et al., 2021 ). Block et al., ( 2019a , 2019b ) present several research criteria for investors. The posit that major criteria in PE investment include revenue growth, value-added of product/service, and management team track record, while international scalability, current profitability, business model, and the reputation of existing investors are considered of lower importance. The discussions have tended to focus on the effect that investors have on firm performance and value, with many studies focusing on the non-financial outcomes of industries such as education (Eaton et al., 2020 ) and nursing homes (S. S. Huang & Bowblis, 2019 ). The growth in private equity seems to follow the predictions of Michael Jensen, who had predicted that private equity would eclipse public corporations because it is a superior form of ownership (Morris & Phalippou, 2020 ). The growing importance of private equity seems to confirm this prediction, but more work has to be done to evaluate the “quality” aspect of private equity. This has led to more scholars studying the strategic aspects of private equity. In addition, scholars also need to focus on the recent pandemic to analyze changes in firms’ financing choices. Moreover, we do not discount the possibility that the privatization of public corporations is not a linear affair, as firms strategize for survival and success. In this regard, it may be worthwhile for future research to examine the cycles and waves of privatization strategy and the role of private equity in respective phases of that strategy. Thus, future research can consider pursuing the following research questions:

Is private equity a superior form of ownership compared to public corporation?

What is the effect of exogenous shocks on private equity investments and financing choices?

What role does private equity play in the cycles and waves of privatization?

7.14 Frontier #2: Alternative financing and firm outcomes

The second emergent research frontier focuses on alternative financing and firm outcomes , with a particular focus on sources such as crowdfunding and angel investors. While venture capital firms remain an important source of private equity, alternative financing avenues have recently gained prominence. The exploration of new directions of entrepreneurial finance has been the primary motivator for such research. The topics explored include initial coin offerings (ICO) (Fisch & Momtaz, 2020 ; W. Huang et al., 2020 ; Meoli & Vismara, 2022 ), equity crowdfunding (Cummings et al., 2020 ), government-supported participative loans (Bertoni, Martí, et al., 2019a , 2019b ), and angel investment (D. Cumming & Zhang, 2019 ). Both the exploration of entrepreneurial finance methods and their relationship with firm performance have garnered much attention (Vismara, 2022 ). Fisch and Momtaz ( 2020 ) focus on post-ICO performance, finding that institutional investor backing is associated with a high ICO performance. Cirillo et al. ( 2019 ) focus on research and development in family firms and the role that private equity and banks play in these firms. Yung ( 2019 ) explores entrepreneurial manipulation and staged financing. Bongini et al. ( 2021 ) explore market-based financing and SME access. Finally, Collewaert et al. ( 2021 ) study angel investors’ post-investment governance. In this research front, more focus has been given to alternate sources of private equity. This is all the more important as many such offerings may not result in monetary gains for the investors (Signori & Vismara, 2018 ). Hence, one possible avenue for future research would be to compare and contrast the enablers, barriers, and consequences of alternative financing methods. Moreover, the plethora of alternative financing methods also points to the need to understand its governance, as well as possible manipulation that may occur so as to safeguard both the investors participating in and the firms receiving funding from alternative financing. Thus, future research may pursue the following research questions:

What are the enablers, barriers, and consequences of alternative financing methods, including their similarities and differences?

How are the different forms of alternative financing governed, what are their similarities and differences, and how should firms go about managing the governance for different sources of finance if they choose to pursue a diversified financing strategy predicated on alternative finance?

What are the factors driving entrepreneurial staging and manipulation across alternative financing methods and how can such manipulation be identified and mitigated?

7.15 Frontier #3: Private equity investment outcomes

The third emergent research frontier deals with private equity investment outcomes . Unlike the second emergent research frontier, which focuses on firm outcomes and their association with private equity, this cluster is more concerned with private equity investment outcomes. Researchers’ interests relate to different aspects of private equity investments, including manipulated returns of private equity investments (Brown et al., 2019a , 2019b ; Cumming & Walz, 2010 ), impact investing (Barber et al., 2021 ), investment costs (Nadauld et al., 2019 ), diversification and portfolio (Delfim & Hoesli, 2019 ; Platanakis et al., 2019 ), risk (Arnold et al., 2019 ), and the role of education ties in driving returns (Fuchs et al., 2022 ). In addition, researchers have explored the investor side of private equity by looking at the various types of investments and exploring private equity investors’ investment behavior. Andonov et al. ( 2021 ) explore the performance of private and public institutional investors in the infrastructure sector, finding that private institutional investors perform better than public ones. Batt and Appelbaum ( 2021 ) look at private equity from a corporate governance perspective. In the future, researchers may wish to explore the nuances of private equity investments by focusing on their returns and valuations, as well as the effects of impact investing. In addition, future research should (re)explore and (re)update our understanding of investor behavior due to the constant changes emerging from new and transitioned generations, as well as the new reality of an increasingly disruptive, volatile, uncertain, complex, and ambiguous (DVUCA) environment. Thus, future research is encouraged to consider the following research questions:

What are the factors affecting the returns and valuations on private equity investments?

How does impact investing affect the economy and sustainable development?

What are the factors driving investing behavior of private equity investors across generations in an increasingly disruptive, volatile, uncertain, complex, and ambiguous environment?

To what extent are private equity investment decisions and outcomes associated with fraud risk and actual fraud?

7.16 Frontier #4: Private equity and entrepreneurship

The final emergent research frontier deals with the role of private equity in entrepreneurship . The most cited article under this theme, by Bertoni et al. ( 2019a ), focuses on the role of government venture capital in the development of the entrepreneurial ecosystem. In a similar vein, Giraudo et al. ( 2019 ) explore the role of entrepreneurship policy. The discussion here suggests a focus on institutional factors and their impact on the entrepreneurial ecosystem. Other research has focused on the role that private equity firms play in firm competencies (e.g., innovation) (Sun et al., 2019 ) and firm quality (Vanacker et al., 2020 ). Apart from the research streams mentioned above, researchers have also focused on the life cycle of venture capital firms (Ma, 2020 ). More recently, research has focused on the effect of private equity investment on the acquisition of non-financial resources (Quas et al., 2021 ) such as research and development (R&D) (Chahine et al., 2021a , 2021b ). Hence, research in this frontier has delved into the non-financial gains of private equity investments in entrepreneurship. Entrepreneurial finance has been a major focus of research in recent times; therefore, it makes sense to further explore the topic by investigating how private equity helps entrepreneurship gain access to resources other than financial ones. Moreover, as entrepreneurs grow over time, their preference and outlook of private equity may also change. Similarly, as entrepreneurial ventures transition from startups to scaleups, the need for private equity will also evolve. In this regard, future researchers should not view entrepreneurial finance as a fixed state, but rather as a dynamic, evolutionary phenomenon in private equity research. Moreover, it is important to remember that not entrepreneurial ventures are the same, and thus, future research will need to account for the unique peculiarities in entrepreneurship across contexts (e.g., digital versus brick-and-mortar retail, developed versus developing country, small versus medium enterprises) and industries (e.g., manufacturing versus services). Thus, future research aligned to the following research questions are likely to be potentially fruitful:

How does private equity help entrepreneurs across contexts and industries gain access to resources other than financial ones?

How do entrepreneur preference and outlook on private equity change over time across contexts and industries?

How can private equity remain relevant in tandem with how entrepreneurial ventures evolve over time across contexts and industries?

How does private equity affect the real outcomes of the firms in which it finances, including non-financial performance metrics?

8 Conclusion

This study used bibliometric analysis to present a comprehensive encapsulation of the fields of venture capital and private equity. We aimed to achieve three research objectives by using a range of tools, including performance analysis, co-authorship analysis, co-citation analysis, and bibliographic coupling.

The data over the sample period 2001 to 2021 indicate that a number of prominent scholars have contributed to research in both fields. In the methodology analysis, we found that the number of studies on single-country and multi-country research was almost equal for private equity while venture capital studies trend in favor of a single country. Further, our analysis also showed that, in single-country studies, researchers have focused mostly on the USA in both venture capital and private equity; more recently, however, researchers have also explored the Chinese context. The institutional contexts of less researched areas, such as Africa, the Middle East, South Asia, and Latin America, present opportunities for future research.

The thematic analysis of venture capital research revealed that the foundational themes in the field include venture capital adoption and financing processes , venture capital roles in business , venture capital governance , venture capital syndication , and venture capital and creation of public organizations , whereas the field’s emergent themes or frontiers in recent times include venture capital and sustainable entrepreneurship , fintech and crowdfunding , venture capital investment strategies , venture capital and innovation , entrepreneurial finance , venture capital and IPOs , and drivers of venture capital funding decisions . Whereas the thematic analysis of private equity research showed that venture capital is one of the field’s foundational themes alongside buyouts and privatization , market mechanisms and venture capital backed IPOs , and performance and valuation of private equity investments . In more recent times, authors have focused on private equity and strategy , alternative financing and firm outcomes , private equity investment outcomes , and private equity and entrepreneurship . Indeed, research in venture capital and private equity, though still rooted in financing research on capital budgeting and IPO, has grown to include a range of topics, with entrepreneurial finance and behavioral aspects of venture capital and private equity investments being the most prominent ones. In the future, scholars should further explore these areas to advance these fields.

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This appendix presents Google Scholar data dating back to 1990 on documents relating to venture capital and private equity.

Documents with the words “venture capital” and “private equity” found on Google Scholar

Figure 7 shows a significant growth in venture capital and private equity research starting in the late 1990s and early 2000s. The Google Scholar hits are to both published and working papers. Some early scholars that worked on venture capital and private equity starting in the early 1990s include Mike Wright (106,150 citations on Google Scholar as of January 15, 2022), Josh Lerner (63,781 citations on Google Scholar as of January 15, 2022), and Paul Gompers (45,715 citations on Google Scholar as of January 15, 2022).

In contrast, the data in the present study comprised of published papers only for the period of 2001 to 2021. The period was originally selected by the second author and then agreed upon by all authors, to cover a period over which there was a rapid expansion of venture capital and private equity research and a wide breadth of research on topic. The data for earlier periods showed a much smaller number of authors and topic areas within these fields, and hence a systematic analysis and review of those earlier periods are not a part of this study. Also, the more remote data offer fewer insights into current trends and future research directions, which were the main aims of this study. The time period was not selected for any particular reverse engineering of results.

It is also interesting that the Google Scholar data shows a leveling off for private equity research around 2009, and venture capital around 2013. These trends could be explained by the maturing of both fields, with many foundational insights already researched and reported at this stage. Also, these trends might be explained by the emergence and massive growth of crowdfunding and fintech and research, which are two areas that many venture capital and private equity scholars might have migrated to since the early 2010s. Future research could analyze and explain these trends.

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Cumming, D., Kumar, S., Lim, W.M. et al. Mapping the venture capital and private equity research: a bibliometric review and future research agenda. Small Bus Econ 61 , 173–221 (2023). https://doi.org/10.1007/s11187-022-00684-9

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What Is Venture Capital (VC)?

Understanding VC

Types of Venture Capital

How to secure vc funding.

Pros and Cons

Angel Investors

Venture capital success, the bottom line.

Alternative Investments
Private Equity & VC

What Is Venture Capital?

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. Venture capital generally comes from investors, investment banks, and financial institutions. Venture capital can also be provided as technical or managerial expertise.

Key Takeaways

Venture capital (VC) is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential.
Venture capitalists provide backing through financing, technological expertise, or managerial experience.
VC firms raise money from limited partners (LPs) to invest in promising startups or even larger venture funds.

Investopedia / Michela Buttignol

Understanding Venture Capital (VC)

VC provides financing to startups and small companies that investors believe have great growth potential. Financing typically comes in the form of private equity (PE) . Ownership positions are sold to a few investors through independent limited partnerships (LPs). Venture capital tends to focus on emerging companies, while PE tends to fund established companies seeking an equity infusion. VC is an essential source for raising money, especially if start-ups lack access to capital markets , bank loans, or other debt instruments.

Harvard Business School professor Georges Doriot is generally considered the "Father of Venture Capital." He started the American Research and Development Corporation in 1946 and raised a $3.58 million fund to invest in companies that commercialized technologies developed during WWII. The corporation's first investment was in a company that had ambitions to use X-ray technology for cancer treatment. The $200,000 that Doriot invested turned into $1.8 million when the company went public in 1955.

VC became synonymous with the growth of technology companies in Silicon Valley on the West Coast. By 1992, 48% of all investment dollars went into West Coast companies; Northeast Coast industries accounted for just 20%. During 2022, West Coast companies accounted for more than 37% of all deals while the Mid-Atlantic region saw just around 24% of all deals.

Pre-Seed: This is the earliest stage of business development when the founders try to turn an idea into a concrete business plan. They may enroll in a business accelerator to secure early funding and mentorship.
Seed Funding: This is the point where a new business seeks to launch its first product. Since there are no revenue streams yet, the company will need VCs to fund all of its operations.
Early-Stage Funding: Once a business has developed a product, it will need additional capital to ramp up production and sales before it can become self-funding. The business will then need one or more funding rounds, typically denoted incrementally as Series A, Series B, etc.

$285 billion

The amount global VC-backed companies raised in 2023.

Submit a Business Plan: Any business looking for venture capital must submit a business plan to a venture capital firm or an angel investor . The firm or the investor will perform due diligence , which includes a thorough investigation of the company's business model , products, management, and operating history.
Investment Pledge: Once due diligence has been completed, the firm or the investor will pledge an investment of capital in exchange for equity in the company. These funds may be provided all at once, but more typically the capital is provided in rounds. The firm or investor then takes an active role in the funded company, advising and monitoring its progress before releasing additional funds.
Exit: The investor exits the company after some time, typically four to six years after the initial investment , by initiating a merger , acquisition, or initial public offering (IPO) .

Many venture capitalists have had prior investment experience, often as equity research analysts . VC professionals tend to concentrate on a particular industry. A venture capitalist who specializes in healthcare, for example, may have had prior experience as a healthcare industry analyst.

Advantages and Disadvantages of Venture Capital

Venture capital provides funding to new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies. VCs often provide mentoring and networking services to help them find talent and advisors. A strong VC backing can be leveraged into further investments.

However, a business that accepts venture capital support can lose creative control over its future direction. VC investors are likely to demand a large share of company equity, and they may make demands of the company's management. Many VCs are only seeking to make a fast, high-return payoff and may pressure the company for a quick exit.

Provides early-stage companies with capital to bootstrap operations

Companies don't need cash flow or assets to secure VC funding

VC-backed mentoring and networking services help new companies secure talent and growth

Demand a large share of company equity

Companies may find themselves losing creative control as investors demand immediate returns

VCs may pressure companies to exit investments rather than pursue long-term growth

Venture capital can be provided by high net-worth individuals (HNWIs) , also often known as angel investors, or venture capital firms. The National Venture Capital Association is an organization composed of venture capital firms that fund innovative enterprises.

Angel investors are typically a diverse group of individuals who have amassed their wealth through a variety of sources. However, they tend to be entrepreneurs themselves, or recently retired executives from business empires. The majority look to invest in well-managed companies, that have a fully-developed business plan and are poised for substantial growth.

These investors are also likely to offer to fund ventures that are involved in the same or similar industries or business sectors with which they are familiar. Another common occurrence among angel investors is co-investing , in which one angel investor funds a venture alongside a trusted friend or associate, often another angel investor.

Due to the industry's proximity to Silicon Valley, the overwhelming majority of deals financed by venture capitalists occurred in the technology industry—the internet, healthcare, computer hardware and services, and mobile and telecommunications. In 2023, San Francisco still ranked highest among VC investments. Other industries have benefited from VC funding, including Staples and Starbucks ( SBUX ).

Google and Intel have venture funds to invest in emerging technology. In 2019, Starbucks also announced a $100 million venture fund to invest in food startups. VC has matured over time and the industry comprises an assortment of players and investor types who invest in different stages of a startup's evolution.

Why Is Venture Capital Important?

New businesses are often highly risky and cost-intensive ventures. As a result, external capital is often sought to spread the risk of failure . In return for taking on this risk through investment, investors in new companies can obtain equity and voting rights for cents on the potential dollar. Venture capital, therefore, allows startups to get off the ground and founders to fulfill their vision.

What Is Late Stage Investing?

Late-stage financing has become more popular because institutional investors prefer to invest in less-risky ventures, as opposed to early-stage companies where the risk of failure is higher.

How Have Regulatory Changes Boosted VC?

The Small Business Investment Act (SBIC) in 1958 boosted the VC industry by providing tax breaks to investors. In 1978, the Revenue Act was amended to reduce the capital gains tax from 49% to 28%. In 1979, a change in the Employee Retirement Income Security Act (ERISA) allowed pension funds to invest up to 10% of their assets in small or new businesses. The capital gains tax was reduced to 20% in 1981. These developments catalyzed growth in VC and the 1980s turned into a boom period for venture capital, with funding levels reaching $4.9 billion in 1987.

Venture capital represents a central part of the lifecycle of a new business. Before a company can start earning revenue, it needs start-up capital to hire employees, rent facilities, and begin designing a product. This funding is provided by VCs in exchange for a share of the new company's equity.

World Intellectual Property Organization, " Global Innovation Index 2022 ," Pages 32-33.

University of Pennsylvania, Wharton Faculty Research. "Organizing Venture Capital: The Rise and Demise of American Research & Development Corporation, 1946–1973 ," Page 17.

The Business History Conference. " The Rise and Fall of Venture Capital ," Pages 5-8.

The Business History Conference. " The Rise and Fall of Venture Capital ," Page 8.

National Venture Capital Association. " Pitchbook-NVCA Venture Monitor Q4 2022 ," Download Excel Spreadsheet, Select "Deals x Region."

CrunchBase. " Global Startup Funding In 2023 Clocks In At Lowest Level In 5 Years ."

National Venture Capital Association. " NVCA Members ."

EY. " Venture Capital Investment Remains Slow as Market Seeks New Normal ."

Intel Capital. " Intel Capital Invests $132 Million in 11 Disruptive Technology Startups ."

Google Ventures. " Home ."

Starbucks. " Starbucks Commits $100 Million as Cornerstone Investor in Valor Siren Ventures I ."

American Economics Association. " Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn ," Pages 238-244.

United States Department of Treasury. " Report to Congress on the Capital Gains Tax Reductions of 1978 ," Page i.

U. S. Congress. " S. 209, The ERISA Improvements Act of 1979: Summary and Analysis of Consideration ," Page 69.

United States Congress. " H.R.4242 - Economic Recovery Tax Act of 1981 ."

The Business History Conference. " The Rise and Fall of Venture Capital ," Page 10.

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Venture Capital Market Research

Venture capital is funding that financiers offer to small startup businesses and companies.

These financiers fund startups that they think have long-term growth potential. the potential for above-average profits is an appealing prospect, but it can be uncertain for the financiers who put up the funding..

The first step for any company in search of venture capital is to present a business plan. The financiers will invest capital in exchange for equity in the startup business. The investment can occur once they complete due diligence and approve the deal.

Understanding Venture Capital Market Research

Venture capital market research involves a deep dive into the financial, technological, and market dynamics that influence venture capital (VC) investments, startup growth, and industry innovation. This type of research is crucial for identifying high-potential startups, emerging sectors, and investment strategies that can yield substantial returns.

This research seeks to map out the terrain of the venture capital world, analyzing investment flows, sector growth patterns, and the performance of portfolio companies. It examines the lifecycle of venture capital investments, from seed stage to late-stage funding rounds, and understands the factors that lead to successful exits, whether through initial public offerings (IPOs) or acquisitions.

Furthermore, venture capital market research employs a variety of data sources and methodologies to gauge the sentiment and strategies of venture capitalists, angel investors, and institutional investors. This includes analyzing historical investment data, surveying investors on their outlook and investment criteria, and studying the impact of macroeconomic trends on venture funding.

Importance of Venture Capital Market Research

For venture capitalists, market research is indispensable for identifying emerging trends and technologies that promise high growth potential. In an environment where the right investment can yield exponential returns, understanding which sectors are ripe for disruption or poised for rapid expansion can significantly impact the success of their investment portfolio. Venture capital market research helps investors to allocate their funds more effectively, targeting industries and startups that align with broader market movements and consumer demands.

Entrepreneurs and startup founders also benefit immensely from venture capital market research. Gaining insights into investor preferences, funding trends, and the competitive landscape helps these innovators tailor their pitches and business models to better meet market expectations and attract investment.

On a broader scale, venture capital market research highlights areas of innovation that could drive future growth. It provides valuable insights into the health of the startup ecosystem, investment patterns, and the potential impact of new technologies on the economy. For policymakers and economic development agencies, this information is critical for crafting policies that support innovation, entrepreneurship, and economic diversification.

Why do VCs Need Market Research?

Market research costs time and money, but its value to VCs is lasting. Market research helps them determine whether a startup is filling a need. It also tells them if the market for the product or service the startup is providing is large enough. They will even know if it has the right team and solution to fill that need. Here are some other reasons why VCs need market research:

Opportunity Identification

VCs want to know what they are getting into when they take a stake in an early-stage company. Market research helps them determine if there is a chance to see a decent return. It will tell them if the product or service is right for the market, and if it will still be relevant in ten years. It will also tell them if regulatory or legal issues can pop up.

VCs tend to focus their investment efforts on specific industry sectors. These sectors include digital media, software, and software as a service. They also include mobile and mobile devices, semiconductors, and biotech. VCs tend to do early-stage seed financing. They also do later-stage rounds with companies that have achieved meaningful revenues. Geography plays a part in the decision. VC funding is common in areas like New York City and Silicon Valley.

Strategy Formulation and Execution

Timing is everything in the VC industry. Market research helps these financiers to decide when to invest. With market research, they can develop a proper investment plan. They can avoid investing in the wrong industry. They can also avoid betting on technology in an unproven market segment. A good strategy will enable them to reap extraordinary returns with very low risk.

Competitive Analysis

A VC might be able to review the full competitive advantage of a company if he or she has ten hours available. It gets a lot harder when a VC is closing hundreds of deals per year. A research company can look at the competition and report on market saturation.

Trend Tracking

Market researchers can track trends that have the potential to disrupt industries. One of these digital disruptors is artificial intelligence (AI). Another digital innovation that can disrupt traditional venture capital is cryptocurrency. Digital crowdfunding is the third disruptor. Market researchers can give VCs valuable information on these trends. The VC to can then build strategies around them.

Benefits of Venture Capital Market Research

Venture capital market research provides a wealth of advantages to stakeholders within the startup ecosystem, offering critical insights that can steer investment decisions, startup growth strategies, and policy development. Here are some key benefits:

• Informed Investment Strategies : Venture capital market research equips investors with the knowledge to craft nuanced investment strategies. By understanding market trends, sector growth potential, and startup performance metrics, investors can identify promising investment opportunities and allocate capital more effectively.

• Sectoral Insights and Trend Identification : One of the primary advantages of venture capital market research is its ability to spotlight emerging sectors and innovation trends. Investors and entrepreneurs gain a forward-looking perspective on which technologies or business models are poised for growth, allowing them to stay ahead of the curve.

• Competitive Analysis : Venture capital market research provides detailed analyses of competitor strategies, strengths, weaknesses, and market positioning, enabling stakeholders to identify unique value propositions and differentiation opportunities.

• Performance Benchmarking : For venture capital firms and their portfolio companies, market research offers benchmarks for performance comparison. This includes financial metrics, operational efficiencies, and market penetration rates, helping firms gauge the success of their investments relative to industry standards.

• Market Entry and Expansion Guidance : For startups looking to enter new markets or expand their product lines, venture capital market research provides critical insights into market demand, customer preferences, and entry barriers. This information is vital for tailoring market entry strategies and minimizing the risks associated with expansion.

Who Uses Venture Capital Market Research

The primary users of venture capital market research are VC firms and individual investors . They rely on this research to identify emerging trends, assess the viability of different sectors, and make informed decisions about where to allocate their investments. Market research helps these investors to discern high-potential startups, evaluate the competitive landscape, and develop strategies for portfolio diversification and risk management.

Entrepreneurs and startup teams also utilize venture capital market research to understand the investment climate, investor preferences, and the competitive dynamics of their industry. This information is pivotal for refining business models, developing pitch decks, and aligning their products or services with market demands to attract funding.

Furthermore , financial analysts and advisors specializing in venture capital and startup financing use market research to provide clients with advice on investment opportunities, portfolio management, and market entry strategies. Their expertise in interpreting market data helps investors and startups alike to make decisions that are grounded in solid market analysis.

Government bodies and economic development organizations leverage venture capital market research to inform policymaking, support startup ecosystems, and stimulate economic growth. Insights into the health of the venture capital market, investment trends, and areas of innovation help these agencies craft policies that encourage entrepreneurship, investment, and technological development.

What to Expect from Venture Capital Market Research

Venture capital market research is a cornerstone for investors and startups navigating the complex and fast-paced environment of venture funding. Therefore, knowing what to expect from this research can significantly enhance strategic planning, investment decisions, and market positioning. Here are key expectations:

• Comprehensive Industry Analyses : Businesses can expect in-depth reviews of specific industries, including growth trends, key drivers, and potential challenges. This analysis provides a foundation for understanding where the industry is headed and which sectors are ripe for innovation and investment.

• Startup Ecosystem Insights : Detailed insights into the startup ecosystem, including emerging startups, notable exits, and funding rounds, offer a clear picture of the competitive landscape and where venture capital is flowing.

• Investment Trends and Patterns : Venture capital market research sheds light on current investment trends, including which stages of startup development are attracting the most funding, average deal sizes, and the geographical distribution of investments.

• Emerging Technologies and Innovations : A forward-looking perspective on emerging technologies, potential disruptors, and innovative business models is a hallmark of venture capital market research.

• Global Market Dynamics : For venture capital firms looking beyond domestic markets, research will include insights into global market dynamics, cross-border investment opportunities, and challenges of investing in startups across different regulatory and business environments.

Technologies and Tools in Venture Capital Market Research

Venture capital market research leverages a suite of advanced technologies and tools to gather, analyze, and interpret data, enabling investors and startups to make informed decisions. The integration of these technologies has transformed market research, offering deeper insights and more accurate forecasts.

• Data Analytics Platforms : Tools like Tableau, Google Analytics, and Microsoft Power BI are essential for analyzing large datasets, visualizing trends, and extracting actionable insights. These platforms allow researchers to identify patterns, benchmark performance, and forecast future market movements effectively.

• Customer Relationship Management (CRM) Software : CRM systems, such as Salesforce and HubSpot, play a crucial role in managing and analyzing interactions with potential and current investments. These tools help in tracking communication, investment stages, and outcomes, providing a comprehensive view of the investment pipeline.

• Artificial Intelligence (AI) and Machine Learning (ML) : AI and ML algorithms are increasingly employed to process vast amounts of data, identify investment opportunities, and predict startup success rates. Tools like IBM Watson and Google Cloud AI provide advanced capabilities for natural language processing, sentiment analysis, and predictive modeling.

• Blockchain Technology : For venture capital firms investing in fintech or looking to enhance transparency and security in transactions, blockchain technology offers significant advantages. Platforms like Ethereum can be used for smart contracts, ensuring transparent and secure investment agreements.

• Collaboration and Project Management Tools : As venture capital market research often involves teams working on different aspects of research, tools like Slack, Trello, and Asana help in coordinating efforts, sharing insights, and managing research projects effectively.

Opportunities

Once the province of US tech hubs, venture capital has gone global. London has the seventh-largest share of global venture capital investment. Beijing is the ninth-largest. Other major cities falling in the top twenty are Toronto, Shanghai, Mumbai, Paris, Bangalore, and Moscow. Larger metros like London and Beijing have an advantage due to their sheer size. Still, the investment opportunities remain uneven. Only a few major cities outside the US share in the VC pie.

Small businesses like clothing stores and restaurants rarely qualify for venture capital. Their business models do not accommodate rapid growth and expansion. However, if a restaurant is trying to expand into a super chain like Olive Garden, VC firms might be keen to invest. VC firms can also provide the technical expertise needed for rapid expansion.

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Christopher Davenport, MBA, is founder/CEO of Autoparts4Less (OTCBQ:FLES), a global online marketplace of parts for all kinds of vehicles.

Not surprisingly, venture capital — in the past couple of years especially — has become one of the primary funding sources for startups and mid-range businesses to finance their growth. With 399 offerings collectively raising $142.5 billion , 2021 was the biggest year to date for initial public offerings (IPOs).

So far in 2022, as of April, 87 more IPOs have already been introduced . But while it’s clear that venture capital is an important source for funding start-up costs, expansion and further integration with other businesses, the problem has always been how to get it.

First off, you should know what venture capital is and what it does. It’s going to be impossible for you to hunt down leads if you’re not sure what you’re looking for. It’s not like the old days when someone had an idea and instantly had an investor take an interest in it and run with it. Especially now, with the internet ruling the world, the process of finding and acquiring venture capital has resembled finding needles in haystacks.

Let’s first review the five main stages of venture capital.

• Seed Funding: You require financing to develop an idea or concept of a product or service.

• Start-Up Funding: The research and development of your idea or concept are complete, and everything is set to move into production or to supply the services. Usually, either a business plan, proposal or a prototype of the concept has been developed.

• Emerging Funding: The product or service has been launched. Your business is already seeing profits, and you must now look for manufacturing or marketing funds to increase your company’s presence and the availability of the product or service.

• Expansion Funding: Your company has experienced remarkable development and now requires additional funds to address increased demands. These funds are usually used to grow the business through expansion into new markets and products.

• Bridge Stage: Your company has reached full maturity. Financing acquired here is typically used for mergers, acquisitions or IPOs. This is also the stage when investors cash out for significant returns on investments (ROIs).

From this list, you should now be able to ascertain what kind of money you’re looking for, depending on the stage your company is in. A weapon of choice for most people seeking venture capital is the VCA Online Directory , a complete list of over 6,600 venture capital sources with complete profiles, contact information, management teams and more. From this directory, which can be sorted in several ways, you can then find and approach those sources that best fit your needs.

If the list overwhelms you a bit, there is another, simpler way to reach out to proper venture capital places, but this requires strong Google expertise. Basically, look for news items on places such as PR Newswire , which broadcast articles and alerts on-the-minute about business goings-on — everything from stocks to expansions. These news briefs can be a gold mine for seeking venture capital if you include a few terms in a full search.

For example, suppose you have an online marketplace concept, and you’d like to arrange to meet face-to-face with venture capitalists who deal with seed funding for these types of ventures. First, check PR Newswire for the phrase “seed funding.” A recent search brought up nearly 400 articles to look through, but you can narrow it down to your field or location, such as “online” or “Los Angeles,” etc. Next, read the articles you come across and look to see what similar concepts such as yours were funded and, more importantly, how. Gather a list of prospective venture capital companies at this point and get answers to the following questions.

• What kind of projects does the firm fund?

• What stages do they fund?

• Do you know anyone who can help you approach a particular VC firm?

• What does the VC firm need from you to fully explain your service or product?

There are several ways to find venture capital sources away from the internet altogether as well. You can find various events or conventions in your area that deal with your industry or feature venture capital people, and you can pitch your project to them in person. You can meet with a venture capital representative when developing your business plan and receive advice.

Writing a simple letter to a venture capitalist and inquiring about sending a “pitch” or “cheat sheet” also works wonders. Finally, see if someone you know or trust, such as your attorney, would be willing to send your proposal or pitch to a venture capital firm and recommend your project.

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How High are VC Returns?

Adjusting in this way for the selection bias of firms that go bankrupt, the mean return on VC investments is 57 percent per year, still very large but less dramatic that the 700 percent mean before correcting for selection bias.

Venture capital (VC) investments carry more risk than most investments in the broad public market and their returns are much more modest than commonly thought, according to a new paper by NBER Research Associate John Cochrane . He concludes that VC investments are not dramatically different from publicly listed small growth stocks.

Estimates of the returns to VC investments can be highly misleading because they typically reflect only those firms that have initial public offerings or are acquired by another company. Private companies are more likely to go public when they have achieved a good return. Those that do not achieve a good return are more likely to stay private or go bankrupt. Therefore, ignoring those companies that stay private only counts the winners; it induces an upward bias in the measure of expected returns for potential investors.

In The Risk and Return of Venture Capital (NBER Working Paper No. 8066 ), Cochrane includes those companies that stay private -- the losers as well as the winners-- so as to more accurately estimate the returns on VC investments. His analysis is based on 17,000 financing rounds in 8,000 companies, representing $114 billion of VC dollars, between 1987 and 2000.

Before controlling for the selection problem, Cochrane finds very large average returns among companies that go public or are acquired. The average return is almost 700 percent. Returns in this sample are also very volatile, with a standard deviation of 3,300 percent. Underlying these averages, however, there are a few companies with astounding returns, and a much larger fraction with modest returns. About 15 percent of companies that go public/are acquired achieve returns greater than 1,000 percent; yet 35 percent of the companies achieve returns below 35 percent; and 15 percent of the companies deliver negative returns. The most probable return is only about 25 percent.

Cochrane then estimates how the probability of going public or being acquired increases as the value of the firm increases and the point at which companies go bankrupt, in order to estimate the overall underlying average return, volatility, and sensitivity to movements in the stock market (beta) of VC investments.

Adjusting in this way for the selection bias of firms that go bankrupt, the mean return on VC investments is 57 percent per year, still very large but less dramatic that the 700 percent mean before correcting for selection bias. VC investments are still extremely volatile, with an annual standard deviation of about 100 percent. This is much greater than the roughly 10 percent standard deviation for the S&P-500 in the same period, but similar to the volatility of small publicly traded NASDAQ stocks. The "beta" is close to one, indicating that VC investment returns move up and down one-for-one with the stock market as a whole.

The high volatility is necessary to explain the occasional spectacular successes. Only very volatile investments can occasionally attain 1,000 percent returns. The high average return is explained by the high volatility. If an investment has an even chance of doubling or halving in value, it has a 25 percent mean return. For each dollar invested, you could make a dollar, or lose 50 cents. The larger the volatility, the greater this effect. More directly, VC investments derive their large average returns from a very small chance of a huge payoff. Therefore, enjoying this average return without enormous risk requires a very diversified portfolio. The market also went up substantially in this period, so a 57 percent return would not be that surprising with a beta of 2 to 3; the estimated beta of one implies that investors received an extra reward for holding the poorly diversifiable risks of venture capital in this period.

Cochrane finds that although typical health/biotech investments did better than typical information technology (IT) investments, the higher volatility for IT gives it a larger chance for occasional spectacular successes and thus a larger arithmetic mean return.

Cochrane also finds that second, third, and fourth rounds of VC financing are successively less risky than the first, as one might have guessed. They have progressively lower volatility and therefore lower mean returns. The betas of successive rounds also decline dramatically, from near one for the first round to near zero for fourth rounds, reflecting lower risk in the form of lower sensitivity to market conditions.

In closing, Cochrane cautions that his data sample ends in June of 2000, and most of the positive returns come from the late 1990s. As our sample extends to the NASDAQ decline and the wave of failed venture capital projects, the mean return estimates may decline, and the beta estimates may rise.

-- Andrew Balls

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16 research papers every VC should know

Table of Contents

2. Geographic Concentration of VC Investors in a Syndicate is Correlated to Deal Structure, Board Representation, Follow-On Rounds, and Exit Performance

3. VC firms that lack diversity perform 11%-30% lower on average

4. Venture Capital infusion harms non-VC backed industries in communities

5. VC’s who’ve been fortunate to succeed once keep succeeding as initial success brings them quality deal flow

6. Half of VC investments are predictably bad—based on information known at the time of investment

7. Getting funded by a reputable VC with a strong brand adds a lot of value

8. VCs invest in the team rather than the product or technology

9. VC has real limitations in its ability to advance substantial technological change

10. More collaborative experience among VCs leads to M&A while less leads to an IPO

11. Solo-founded startups are strongly associated with more rapid growth to unicorn status

12. Warm introductions lead to 13x higher chance of funding

13. Venture capitalists should stay in their lane

14. Data makes all the difference

15. Founders can become VCs but that doesn’t guarantee success

16. Successful founders have similar personality traits

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