Venture capitalists at work: A diff-in-diff approach at late-stages of the screening process |
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| Institution: | 1. University of Tennessee, Knoxville, Haslam College of Business, 916 Volunteer Boulevard, Knoxville, TN 37996, United States of America;2. Miami University, Farmer School of Business, 2074 Farmer School of Business, Oxford, OH 45056, United States of America;3. The University of Queensland, Room 513, Joyce Ackroyd Building, St. Lucia Campus, Australia;1. Technical University of Munich, TUM School of Management, Arcisstr. 21, 80333 München, Germany;2. Université Libre de Bruxelles, Solvay Brussels School Economics and Management, Avenue FD Roosevelt 50, 1050 Brussels, Belgium;3. University of Oklahoma, Price College of Business, 307 W. Brooks St., Norman, OK 73069, United States;4. Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, United States;1. University of Oklahoma, 455 W. Lindsey DAHT 205, Norman, OK 73019, United States of America;2. Sykes College of Business, University of Tampa, 401 Kennedy Blvd, Tampa, FL 33606, United States of America;3. Martha and Spencer Love School of Business, Elon University;4. Tom Love Division of Entrepreneurship & Economic Development, OU Price College of Business, University of Oklahoma, 1003 Asp Ave., Norman, OK 73019, United States of America;1. Department of Entrepreneurship, Baylor University, United States of America;2. Rucks Department of Management, E. J. Ourso College of Business, Louisiana State University, United States of America;3. Belk College of Business, University of North Carolina at Charlotte, United States of America;4. Department of Psychology, University of North Carolina at Charlotte, United States of America |
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| Abstract: | In this paper we use a new methodology aimed at identifying only the venture capitalists (VC) treatment effect: we compare a representative sample of firms financed by private VC in the period 2004–2014 with a sample of firms rejected by VC at the very late-stages of the screening process. These firms narrowly lost the contest and are hence very similar, before VC financing, to the VC backed firms; self-selection is specifically taken into account. In line with previous results, Italian startups financed by VC reach a larger size and become more innovative than other startups. On the contrary, sales growth is similar and profitability is worse than firms in the control group. VC-backed companies experience larger rise in labor costs, while the commercialization of their innovative projects takes longer: this explains their worse profitability and the deterioration in their credit score. Both effects tend to disappear after four years from VC financing, when sales increase for VC-backed firms at the same pace as for the control group. Unlike other studies, no differences are detected for the survivorship rates of VC-backed firms in Italy. We also provide new evidence on the impact of VC on firms’ financial structures: VC-backed firms show a much larger increase in equity; this rise is however only half the increase in total assets that is hence not only explained by the injection of VC equity. Another result in this direction is that the effects on firms’ size and innovation hold when we restrict the control group to firms that also increase their equity from investors different from VC; this suggests that VC effects on size and innovation might also be linked to their managerial expertise and network connections. Finally, in line with previous evidence, the effects found in the paper are exclusively driven by independent VC investors compared with captive VC. |
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| Keywords: | Venture capital Innovation Firm financial structure Difference-in-differences |
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