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Mutual Funds as Venture Capitalists? Evidence from Unicorns
[The role of boards of directors in corporate governance: a conceptual framework and survey]

Author

Listed:
  • Sergey Chernenko
  • Josh Lerner
  • Yao Zeng

Abstract

“Founder-friendly” venture financings and nontraditional venture investors have both flourished over the past decade. Using detailed contract data, we study open-end mutual funds investing in private venture-backed firms. We posit that conflicts between early-stage venture investors and liquidity-constrained later-stage ones influence the classic agency problems affecting entrepreneurs and investors. We find that mutual funds with more stable funding are more likely to invest in private firms and that financing rounds with mutual fund participation have stronger redemption, stronger IPO-related rights, and less board representation. These findings are consistent with our conceptual framework.

Suggested Citation

  • Sergey Chernenko & Josh Lerner & Yao Zeng, 2021. "Mutual Funds as Venture Capitalists? Evidence from Unicorns [The role of boards of directors in corporate governance: a conceptual framework and survey]," The Review of Financial Studies, Society for Financial Studies, vol. 34(5), pages 2362-2410.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:5:p:2362-2410.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa100
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    References listed on IDEAS

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    Cited by:

    1. Michael Ewens & Nadya Malenko, 2020. "Board Dynamics over the Startup Life Cycle," NBER Working Papers 27769, National Bureau of Economic Research, Inc.
    2. Lele Cao & Vilhelm von Ehrenheim & Sebastian Krakowski & Xiaoxue Li & Alexandra Lutz, 2022. "Using Deep Learning to Find the Next Unicorn: A Practical Synthesis," Papers 2210.14195, arXiv.org.
    3. Agarwal, Vikas & Barber, Brad M. & Cheng, Si & Hameed, Allaudeen & Shanker, Harshini & Yasuda, Ayako, 2023. "Do investors overvalue startups? Evidence from the junior stakes of mutual funds," CFR Working Papers 23-04, University of Cologne, Centre for Financial Research (CFR).
    4. Michael Ewens & Joan Farre-Mensa, 2020. "The Deregulation of the Private Equity Markets and the Decline in IPOs," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5463-5509.
    5. Aggarwal, Dhruv & Eldar, Ofer & Hochberg, Yael V. & Litov, Lubomir P., 2022. "The rise of dual-class stock IPOs," Journal of Financial Economics, Elsevier, vol. 144(1), pages 122-153.
    6. Michael Ewens & Joan Farre-Mensa, 2022. "Private or Public Equity? The Evolving Entrepreneurial Finance Landscape," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 271-293, November.
    7. Burström, Thommie & Lahti, Tom & Parida, Vinit & Wartiovaara, Markus & Wincent, Joakim, 2023. "A definition, review, and extension of global ecosystems theory: Trends, architecture and orchestration of global VCs and mechanisms behind unicorns," Journal of Business Research, Elsevier, vol. 157(C).
    8. William Gornall & Ilya A. Strebulaev, 2017. "Squaring Venture Capital Valuations with Reality," NBER Working Papers 23895, National Bureau of Economic Research, Inc.
    9. Gornall, Will & Strebulaev, Ilya A., 2020. "Squaring venture capital valuations with reality," Journal of Financial Economics, Elsevier, vol. 135(1), pages 120-143.
    10. Lele Cao & Gustaf Halvardsson & Andrew McCornack & Vilhelm von Ehrenheim & Pawel Herman, 2023. "Sourcing Investment Targets for Venture and Growth Capital Using Multivariate Time Series Transformer," Papers 2309.16888, arXiv.org.
    11. Bian, Bo & Li, Yingxiang & Nigro, Casimiro A., 2022. "Conflicting fiduciary duties and fire sales of VC-backed start-ups," LawFin Working Paper Series 35, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    12. Julian Kaboth & Arnd Lodowicks & Maximilian Schreiter & Bernhard Schwetzler, 2023. "Same same but different: how preferential claims trigger valuation discounts in equity tranches of VC-backed firms," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 877-914, April.
    13. Kang, Jun-Koo & Li, Yingxiang & Oh, Seungjoon, 2022. "Venture Capital Coordination in Syndicates, Corporate Monitoring, and Firm Performance," Journal of Financial Intermediation, Elsevier, vol. 50(C).
    14. Pop Izabela Luiza & Hordău Anne Marie, 2017. "Financial Investments in Romania. A Comparative Analysis between Open-end Mutual Funds and Bank Deposits," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 620-626, December.
    15. Li, Emma & Mao, Mike Qinghao & Zhang, Hong Feng & Zheng, Hao, 2023. "Banks’ investments in fintech ventures," Journal of Banking & Finance, Elsevier, vol. 149(C).
    16. Kuckertz, Andreas & Scheu, Maximilian & Davidsson, Per, 2023. "Chasing mythical creatures – A (not-so-sympathetic) critique of entrepreneurship's obsession with unicorn startups," Journal of Business Venturing Insights, Elsevier, vol. 19(C).

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    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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