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Learning by Investing: Evidence from Venture Capital

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  • Sorensen, Morten

    (University of Chicago GSB)

Abstract

To understand the investment behavior of venture capital (VC) investors, this paper estimates a dynamic model of learning. Behavior reflecting both learning from past investments (exploitation) and anticipated future learning (exploration) are found to be prevalent, and the model's additional predictions about success rates and investment speeds are confirmed empirically. Learning is important, since it can create informational frictions, and it has potential implications for VCs' investments and organizations. VCs are found to internalize the value of learning, and this may help promote exploration beyond the levels sustained in standard capital markets, which is socially valuable.

Suggested Citation

  • Sorensen, Morten, 2007. "Learning by Investing: Evidence from Venture Capital," SIFR Research Report Series 53, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0053
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    File URL: http://www.sifr.org/PDFs/sifr-wp53.pdf
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    References listed on IDEAS

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    Cited by:

    1. Richard T. Harrison & Colin Mason & Donald Smith, 2015. "Heuristics, learning and the business angel investment decision-making process," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 27(9-10), pages 527-554, October.
    2. Bengtsson, Ola & Hand, John R.M., 2011. "CEO compensation in venture-backed firms," Journal of Business Venturing, Elsevier, vol. 26(4), pages 391-411, July.

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    More about this item

    Keywords

    Venture capital; Learning; Multi-armed bandit model;
    All these keywords.

    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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