The Performance Puzzle in Venture Capital and Private Equity Style Drifts

Prior research shows directly conflicting evidence on the performance implications of style drift in venture capital and private equity, which represents an unresolved puzzle. In this paper, we identify one compelling source for this conflicting evidence. We differentiate between initial style drift, occurring when a venture capital (VC) fund invests in a company for the first time, and follow-on style drift, which occurs when a VC makes subsequent investments in the same company. We hypothesize that follow-on style drift investments involve an exacerbated escalation of commitment, leading to a negative impact on performance. Consistent with this hypothesis, we provide large sample evidence that initial style drift investments have superior, positive exit performance, while follow-on style drift investments have substantially worse exit performance. We discuss implications and future research suggestions.