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On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms

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  • Manju Puri
  • Rebecca Zarutskie

Abstract

We use a new data set that tracks U.S. firms from their birth over two decades to understand the life cycle dynamics and outcomes (both successes and failures) of VC- and non-VC financed firms. We first ask to what market-wide and firm-level characteristics venture capitalists respond in choosing to make their investments and how this differs for firms financed solely by non-VC sources of entrepreneurial capital. We then ask what are the eventual differences in outcomes for firms that receive VC financing relative to non-VC-financed firms. Our findings suggest that VCs follow public market signals similar to other investors and typically invest largely in young firms, with potential for large scale being an important criterion. The main way that VC financed firms differ from matched non-VC financed firms, is they demonstrate remarkably larger scale both for successful and failed firms, at every point of the firms’ life cycle. They grow more rapidly, but we see little difference in profitability measures at times of exit. We further examine a number of hypotheses relating to VC-financed firms’ failure. We find that VC-financed firms’ cumulative failure rates are lower than non-VC-financed firms but the story is nuanced. VC appears initially “patient” in that VC-financed firms are less likely to fail in the first five years but conditional on surviving past this point become more likely to fail relative to non-VC-financed firms. We perform a number of robustness checks and find that VC does not appear to have more stringent survival thresholds nor do VC-financed firm failures appear to be disguised as acquisitions nor do particular kinds of VC firms seem to be driving our results. Overall, our analysis supports the view that VC is “patient” capital relative to other non-VC sources of entrepreneurial capital in the early part of firms’ lifecycles and that an important criterion for receiving VC investment is potential for large scale, rather than level of profitability, prior to exit.

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File URL: ftp://ftp2.census.gov/ces/wp/2008/CES-WP-08-13.pdf
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 08-13.

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Length: 51 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:cen:wpaper:08-13

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  1. Kaplan, Steven N. & Strömberg, Per, 2003. "Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses," SIFR Research Report Series, Institute for Financial Research 14, Institute for Financial Research.
  2. Morten Sørensen, 2007. "How Smart Is Smart Money? A Two-Sided Matching Model of Venture Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 62(6), pages 2725-2762, December.
  3. Steven N. Kaplan & Per Stromberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 281-315, 04.
  4. Kaplan, Steve & Schoar, Antoinette, 2004. "Private Equity Performance: Returns, Persistence and Capital Flows," Working papers 4446-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2008. "Who are the active investors? Evidence from venture capital," Open Access publications from Tilburg University urn:nbn:nl:ui:12-305977, Tilburg University.
  6. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
  7. Thomas Hellmann & Manju Puri, 2002. "Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 57(1), pages 169-197, 02.
  8. Paul Gompers & Anna Kovner & Josh Lerner & David Scharfstein, 2005. "Venture Capital Investment Cycles: The Impact of Public Markets," NBER Working Papers 11385, National Bureau of Economic Research, Inc.
  9. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, American Finance Association, vol. 46(3), pages 879-903, July.
  10. Zarutskie, Rebecca, 2010. "The role of top management team human capital in venture capital markets: Evidence from first-time funds," Journal of Business Venturing, Elsevier, vol. 25(1), pages 155-172, January.
  11. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(1), pages 133-156, September.
  12. Laura Lindsey, 2008. "Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances," Journal of Finance, American Finance Association, American Finance Association, vol. 63(3), pages 1137-1168, 06.
  13. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 301-18, March.
  14. Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, American Finance Association, vol. 52(5), pages 1791-1821, December.
  15. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
  16. Paul Gompers & Josh Lerner, 2001. "The Venture Capital Revolution," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 145-168, Spring.
  17. Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, Econometric Society, vol. 74(1), pages 235-267, 01.
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