Passive Versus Active Growth: Evidence from Founder Choices and Venture Capital Investment

This paper develops a novel approach for assessing the role of passive learning versus a proactive growth orientation in the entrepreneurial growth process. We develop a simple model linking early-stage founder choices, venture capital investment and skewed growth outcomes such as the achievement of an IPO or significant acquisition. Using comprehensive business registration data from 34 US states from 1995-2004, we observe that firms that register in Delaware or obtain intellectual property such as a patent or trademark are far more likely to ultimately realize significant equity growth, and these choices also predict early-stage venture capital investment. Moreover, the estimated probability of receiving venture capital as reflected in early-stage founder choices predicts growth even for firms that do not receive venture capital. We use these findings to estimate bounds on the fraction of proactive versus passive firms among firms that ultimately achieve significant equity growth. While nearly half of all firms that achieve modest equity growth (> $10M) are consistent with passive learning (as they neither make early-stage founder choices nor receive venture capital), 78% of firms experiencing an equity growth event greater than $100M are associated with active founder choices and/or venture capital investment, and these firms are concentrated in geographic hubs such as Silicon Valley. Finally, our approach offers a novel approach for estimating the private returns to venture capital, matching on founder choices rather than demographics; consistent with prior studies, venture-backed firms are approximately 5X more likely to grow, with heterogeneity across location and time period.