Learning By Investing: Evidence from Venture Capital

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.