The Venture Capital Cycle
. Paul A. Gompers and
Josh Lerner. Cambridge, MA: The MIT Press,
2000, 384 pp. ISBN 0-262-07194-0.
This book is a major publishing event in the
venture capital literature. Professors Gompers and
Lerner, both of Harvard Business School, have for
some years made distinguished contributions to
the research literature on venture capital in leading
academic journals. This book aims to bind
together their previously published work into a
coherent whole. What results is a durable piece
of high-quality capital equipment, which acade-
mics, graduate business students, and quantita-
tively inclined practitioners will want to draw
upon again and again.
In structure, the book is a set of ten previously
published papers, grouped under the three main
headings of venture capital fundraising, venture
capital investing, and exiting from venture capital
investments. It is this trinity, fundraising,
investing, and exiting, which constitutes “the
venture capital cycle” of the title. It is an excel-
lent organizing device for the volume as a whole.
Each of the three sections has a new “overview”
chapter. Add to this an introductory chapter, a
chapter length “note” on data sources, and a
concluding chapter on the future of the venture
capital industry, and you have this new book.
As regards its content, this book has no major
surprises. Readers who have avidly collected the
mimeo versions of papers by the authors, and who
have followed through by doing their homework
on the emerging literature in the journals, will
have encountered much of the content of the book
before. However, the whole is more than the sum
of its parts, because the authors bring out the
relationship between their various published works
rather successfully. Further, the three “overview”
chapters, the introduction and the conclusion, are
all well written. They are of a simpler style than
the other chapters, and provide a new and acces-
sible entree to the venture capital literature.
The key ideas of the book are identified by the
authors as: incentive and information problems;
venture capital as a process over time, rather than
a one-off involvement; and lags in adjustment in
the supply of and demand for venture capital
funds. Given the importance of the work, it is
reviewed in detail below.
Quantitative methods are used extensively in
the book, and this can be a valuable source of
pedagogic illustrations, as well as a solid body of
scientific work of interest to specialists. Generally,
descriptive statistics back up the early parts of
each argument, often supported by graphs, line
diagrams and sometimes three dimensional
diagrams. Typically, this is done extraordinarily
well. All of this will be an inspiration to students
contemplating projects on honors or masters
courses, for which this volume provides a superb
mentoring example. Although practitioners too
will enjoy, and learn much from, the quantitative
work.
When it comes to econometrics, however, the
grasp of the authors is a little less secure. In many
cases, a more detailed approach could have been
adopted in their reporting on econometric models.
One often felt that a more discerning approach to
hypothesis testing would also have been desirable.
For example, in the important fourth chapter, on
venture capital compensation, a linear model is
considered for explaining relative value of an IPO
in terms of date of closing, size of venture capital
organization, and venture capitalists’ percentage
of profit. Three modeling alternatives are pre-
sented, OLS, Tobit and 2SLS, though arguably the
OLS results should have been dropped. It is found
that in none of the specifications is there a
significant link between compensation and per-
formance. However, in the case of these models,
the probability values are 0.744, 0.255 and 0.757
respectively. In other words, it is not just the
compensation variable that is not working, it is the
modeling itself.
There is some evidence, however (in the Tobit),
Book Reviews
Small Business Economics
15: 73–78, 2000.
@Phil_Robichaud
@deepthiw
@JoseServera