Stages of VC backed IPO performance

Abstract: Among many institutional investors, there is anecdotal belief that early stage venture capital (VCs which invests in firms at their infancy) provides better returns for limited partner money than later stage venture capital (which initially invest in start-ups that are closer to acquisition or IPO).  Presumably, the VC provides managerial and operational expertise as well as much needed financing early and helps guide the start-up to a successful exit.

Measuring venture capital performance is notoriously problematic.  Granular data are nearly impossible to obtain (industry level data are widely available but not terribly useful), difficult to work with and are full of reporting biases.  Objectively verifiable proxies are useful for getting around this problem.  In this study the public performance of venture-backed entrepreneurs tests if there is any truth to the belief that early stage venture capital provides better risk-adjusted returns than later stage VC money.

There will be two (closely related) test variables.  First early stage VC backed IPO survival is compared against survival from IPOs backed by VCs from all other stages.  The study conducts a similar test between single-stage VCs (early, middle, late) against the performance of entrepreneurs funded by VCs which invest across multiple stages.  The experiment will control for the size of the entrepreneur’s initial public offering, lagged industry performance, the current market for initial public offerings and the age of the entrepreneur at the time of its initial public offering. 

The data combine three well-known sources—CRSP, Compustat and Capital IQ.  CRSP collects the best return data on publicly traded securities.  Computstat houses the best database on characteristics of publicly traded firms.  Capital IQ is a vast, but underused, academically, source of information on privately traded firms, including venture capitalists.  This study uses a proprietary database which links the characteristics of the venture capitalist (Capital IQ) with characteristics of firms that eventually go public (Compustat) and the performance of these IPOs (CRSP).

The study uses survival analysis, specifically constructing a time-to-failure hazard  model (where failure delisting from a major stock exchange or acquisition.  It tests if entrepreneurs with early-stage VC backing survive longer than other VC-backed entrepreneurs.  A multivariate regression returns analysis will support the survival analysis.