On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms
May 2008
Working Paper Number:
CES-08-13
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.
Document Tags and Keywords
Keywords
Keywords are automatically generated using KeyBERT, a powerful and innovative
keyword extraction tool that utilizes BERT embeddings to ensure high-quality and contextually relevant
keywords.
By analyzing the content of working papers, KeyBERT identifies terms and phrases that capture the essence of the
text, highlighting the most significant topics and trends. This approach not only enhances searchability but
provides connections that go beyond potentially domain-specific author-defined keywords.
:
profitability,
investment,
company,
acquisition,
entrepreneurial,
financial,
investing,
venture,
entrepreneur,
finance,
investor,
financing,
acquirer,
profitable,
funding,
fund,
invest
Tags
Tags are automatically generated using a pretrained language model from spaCy, which excels at
several tasks, including entity tagging.
The model is able to label words and phrases by part-of-speech,
including "organizations." By filtering for frequent words and phrases labeled as "organizations", papers are
identified to contain references to specific institutions, datasets, and other organizations.
:
Standard Statistical Establishment List,
Standard Industrial Classification,
Longitudinal Research Database,
Center for Economic Studies,
Ordinary Least Squares,
Columbia University,
Longitudinal Business Database,
Initial Public Offering,
Washington University,
Economic Census,
Wholesale Trade,
Duke University
Similar Working Papers
Similarity between working papers are determined by an unsupervised neural
network model
know as Doc2Vec.
Doc2Vec is a model that represents entire documents as fixed-length vectors, allowing for the
capture of semantic meaning in a way that relates to the context of words within the document. The model learns to
associate a unique vector with each document while simultaneously learning word vectors, enabling tasks such as
document classification, clustering, and similarity detection by preserving the order and structure of words. The
document vectors are compared using cosine similarity/distance to determine the most similar working papers.
Papers identified with 🔥 are in the top 20% of similarity.
The 10 most similar working papers to the working paper 'On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms' are listed below in order of similarity.
-
Working PaperAge and High-Growth Entrepreneurship🔥
April 2018
Working Paper Number:
carra-2018-03
Many observers, and many investors, believe that young people are especially likely to produce the most successful new firms. We use administrative data at the U.S. Census Bureau to study the ages of founders of growth-oriented start-ups in the past decade. Our primary finding is that successful entrepreneurs are middle-aged, not young. The mean founder age for the 1 in 1,000 fastest growing new ventures is 45.0. The findings are broadly similar when considering high-technology sectors, entrepreneurial hubs, and successful firm exits. Prior experience in the specific industry predicts much greater rates of entrepreneurial success. These findings strongly reject common hypotheses that emphasize youth as a key trait of successful entrepreneurs.View Full Paper PDF
-
Working PaperWho Works for Startups? The Relation between Firm Age, Employee Age, and Growth
October 2011
Working Paper Number:
CES-11-31
We present evidence that young employees are an important ingredient in the creation and growth of firms. Our results suggest that young employees possess attributes or skills, such as willingness to take risk or innovativeness, which make them relatively more valuable in young, high growth, firms. Young firms disproportionately hire young employees, controlling for firm size, industry, geography and time. Young employees in young firms command higher wages than young employees in older firms and earn wages that are relatively more equal to older employees within the same firm. Moreover, young employees disproportionately join young firms that subsequently exhibit higher growth and raise venture capital financing. Finally, we show that an increase in the regional supply of young workers increases the rate of new firm creation. Our results are relevant for investors and executives in young, high growth, firms, as well as policymakers interested in fostering entrepreneurship.View Full Paper PDF
-
Working PaperThe Disappearing IPO Puzzle: New Insights from Proprietary U.S. Census Data on Private Firms
June 2020
Working Paper Number:
CES-20-20
The U.S. equity markets have experienced a remarkable decline in IPOs since 2000, both in terms of smaller IPO volume and entrepreneurial firms' greater tendency to exit through acquisitions rather than IPOs. Using proprietary U.S. Census data on private firms, we conduct a comprehensive analysis of the above two notable trends and provide several new insights. First, we find that the dramatic reduction in U.S. IPOs is not due to a weaker economy that is unable to produce enough 'exit eligible' private firms: in fact, the average total factor productivity (TFP) of private firms is slightly higher post-2000 compared to pre-2000. Second, we do not find evidence supporting the conventional wisdom that the disappearing IPO puzzle is mainly driven by the decline in IPO propensity among small private firms. Third, we do not find a significant change in the characteristics of private firms exiting through acquisitions from pre- to post-2000. Fourth, the decline in IPO propensity persists even after we account for the changing characteristics of private firms over time. Fifth, we show that the difference in TFP between IPO firms and acquired firms (and between IPO firms and firms remaining private) went up considerably post-2000 compared to pre-2000. Finally, venture-capital-backed (VC-backed) IPO firms have significantly lower postexit long-term TFP than matched VC-backed private firms in the post-2000 era relative to the pre- 2000 era, while this pattern is absent among IPO and matched private firms without VC backing. Overall, our results strongly support the explanations based on standalone public firms' greater sensitivity to product market competition and entrepreneurial firms' access to more abundant private equity financing in the post-2000 era. We find mixed evidence regarding the explanations based on the smaller net financial benefits of being standalone public firms or the increased need for confidentiality after 2000.View Full Paper PDF
-
Working PaperNature Versus Nurture in the Origins of Highly Productive Businesses: An Exploratory Analysis of U.S. Manufacturing Establishments
September 2011
Working Paper Number:
CES-11-26
This paper investigates the origins of productivity leaders, those that operate close to and help push out the production frontier. Do such businesses emerge as top performers from the very beginning of their lives, for example as the consequence of an outstanding founding idea, technology, or location? Or, at the other extreme, do they appear initially as completely average (or even underperformers) that exhibit gradual improvement as they learn and develop with age? To answer this question we draw upon five decades of U.S. Census of Manufacturing (CM) establishment-level data, tracing the productivity leaders of the most recent CM (2007) back over their observed life spans. We also examine possible industry-level correlates of variation in the extent of nature versus nurture that are suggested by theories of industry dynamics and economic growth.View Full Paper PDF
-
Working PaperThe Going Public Decision and the Product Market
July 2008
Working Paper Number:
CES-08-20
At what point in a firm's life should it go public? How do a firm's ex ante product market characteristics relate to its going public decision? Further, what are the implications of a firm going public on its post-IPO operating and product market performance? In this paper, we answer the above questions by conducting the first large sample study of the going public decisions of U.S. firms in the literature. We use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms. Our findings can be summarized as follows. First, a private firm's product market characteristics (market share, competition, capital intensity, cash flow riskiness) significantly affect its likelihood of going public. Second, private firms facing less information asymmetry and those with projects that are cheaper for outsiders to evaluate are more likely to go public (consistent with Chemmanur and Fulghieri (1999)). Third, IPOs of firms occur at the peak of their productivity cycle (consistent with Clementi (2002)): the dynamics of total factor productivity (TFP) and sales growth exhibit an inverted U-shaped pattern. Finally, sales, capital expenditures, and other performance variables exhibit a consistently increasing pattern over the years before and after the IPO. The last two findings are consistent with the widely documented post-IPO operating underperformance of firms being due to the real investment effects of a firm going public, and inconsistent with underperformance being solely due to earnings management immediately prior to the IPO.View Full Paper PDF
-
Working PaperLeveraged Payouts: How Using New Debt to Pay Returns in Private Equity Affects Firms, Employees, Creditors, and Investors
January 2025
Working Paper Number:
CES-25-12
We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that large leverage increases make firms much riskier, dramatically raising exit and bankruptcy rates but also IPOs. The debt-bankruptcy relationship is in line with Altman-Z model predictions for private firms. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors.View Full Paper PDF
-
Working PaperHow Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface
June 2008
Working Paper Number:
CES-08-16
Using a unique sample from the Longitudinal Research Database (LRD) of the U.S. Census Bureau, we study several related questions regarding the efficiency gains generated by venture capital (VC) investment in private firms. First, does VC backing improve the efficiency (total factor productivity, TFP) of private firms, and are certain kinds of VCs (higher reputation versus lower reputation) better at generating such efficiency gains than others? Second, how are such efficiency gains generated: Do venture capitalists invest in more efficient firms to begin with (screening) or do they improve efficiency after investment (monitoring)? Third, how are these efficiency gains spread out over rounds subsequent to VC investment? Fourth, what are the channels through which such efficiency gains are generated: increases in product market performance (sales) or reductions in various costs (labor, materials, total production costs)? Finally, how do such efficiency gains affect the probability of a successful exit (IPO or acquisition)? Our main findings are as follows. First, the overall efficiency of VC backed firms is higher than that of non-VC backed firms. Second, this efficiency advantage of VC backed firms arises from both screening and monitoring: the efficiency of VC backed firms prior to receiving financing is higher than that of non-VC backed firms and further, the growth in efficiency subsequent to receiving VC financing is greater for such firms relative to non-VC backed firms. Third, the above increase in efficiency of VC backed firms relative to non-VC backed firms increases over the first two rounds of VC financing, and remains at the higher level till exit. Fourth, while the TFP of firms prior to VC financing is lower for higher reputation VC backed firms, the increase in TFP subsequent to financing is significantly higher for the former firms, consistent with higher reputation VCs having greater monitoring ability. Fifth, the efficiency gains generated by VC backing arise primarily from improvement in product market performance (sales); however for higher reputation VCs, the additional efficiency gains arise from both an additional improvement in product market performance as well as from reductions in various input costs. Finally, both the level of TFP of VC backed firms prior to receiving financing and the growth in TFP subsequent to VC financing positively affect the probability of a successful exit (IPO or acquisition).View Full Paper PDF
-
Working PaperR&D or R vs. D? Firm Innovation Strategy and Equity Ownership
April 2020
Working Paper Number:
CES-20-14
We analyze a unique dataset that separately reports research and development expenditures for a large panel of public and private firms. Definitions of 'research' and 'development' in this dataset, respectively, correspond to definitions of knowledge 'exploration' and 'exploitation' in the innovation theory literature. We can thus test theories of how equity ownership status relates to innovation strategy. We find that public firms have greater research intensity than private firms, inconsistent with theories asserting private ownership is more conducive to exploration. We also find public firms invest more intensely in innovation of all sorts. These results suggest relaxed financing constraints enjoyed by public firms, as well as their diversified shareholder bases, make them more conducive to investing in all types of innovation. Reconciling several seemingly conflicting results in prior research, we find private-equity-owned firms, though not less innovative overall than other private firms, skew their innovation strategies toward development and away from research.View Full Paper PDF
-
Working PaperGoing Entrepreneurial? IPOs and New Firm Creation
January 2017
Working Paper Number:
CES-17-18
Using matched employee-employer US Census data, we examine the effect of a successful initial public offering (IPO) on employee departures to startups. Accounting for the endogeneity of a firm's choice to go public, we find strong evidence that going public induces employees to leave for start-ups. Moreover, we document that the increase in turnover following an IPO is driven by employees departing to start-ups; we find no change in the rate of employee departures for established firms. We present evidence that, following an IPO, many employees who received stock grants experience a positive shock to their wealth which allows them to better tolerate the risks associated with joining a startup or to obtain funding. Our results suggest that the recent declines in IPO activity and new firm creation in the US may be causally linked. The recent decline in IPOs means fewer workers may move to startups, decreasing overall new firm creation in the economy.View Full Paper PDF
-
Working PaperCharacteristics of the Top R&D Performing Firms in the U.S.: Evidence from the Survey of Industrial R&D
September 2010
Working Paper Number:
CES-10-33
Innovation drives economic growth and productivity growth, and as such, indicators of innovative activity such as research and development (R&D) expenditures are of paramount importance. We combine Census confidential microdata from two sources in order to examine the characteristics of the top R&D performing firms in the U.S. economy. We use the Survey of Industrial Research and Development (SIRD) to identify the top 200 R&D performing firms in 2003 and, to the extent possible, to trace the evolution of these firms from 1957 to 2007. The Longitudinal Business Database (LBD) further extends our knowledge about these firms and enables us to make comparisons to the U.S. economy. By linking the SIRD and the LBD we are able to create a detailed portrait of the evolution of the top R&D performing firms in the U.S.View Full Paper PDF
