Mutual Funds As Venture Capitalists? Evidence From Unicorns

In a recent paper, authors Sergey Chernenko, Josh Lerner, and Yao Zeng consider investments by mutual funds ("cross over funds") in 99 unicorn companies. Given the rise in recent years of investments by cross over funds in private companies, the authors compare the investments made by these funds compared to those made by venture capital funds. There have been numerous studies examining the role of venture capital funds in governance of private companies and the contribution of venture funds to promoting certain governance practices and information reporting. Not surprisingly, the authors find that more often than not cross over funds structure their investments as straight convertible preferred stock, rather than participating preferred stock. Cross over funds are more focused on cash flow rights, require stronger redemption rights, and generally are not interested in board representation or other roles in the companies. As a result, mutual funds tend not to...