The Lifecycle of Venture Capital Funds

We uncover a lifecycle pattern in VC: startups backed earlier in a fund’s life are more likely to achieve successful exits through IPOs and M&As and to exhibit higher performance relative to public market benchmarks. We show that this pattern is driven by three reinforcing mechanisms - financing, monitoring, and sorting. VC funds are finite-lived vehicles with declining capacity, and therefore early investments benefit from greater access to follow-on capital, receive more intensive monitoring, and are more likely to match with high-quality entrepreneurs. We provide empirical evidence for each mechanism and support these findings with a theoretical model and a survey of investors and entrepreneurs. Together, our results provide a comprehensive account of how VC funds match with entrepreneurs, deploy capital and expertise, and how this value proposition evolves over the lifecycle of a fund.