Dynamic capabilities and venture performance: The effects of venture capitalists

After going through the initial public offering (IPO), new ventures face increased competition, greater public examination, and increased government scrutiny. Resource base weaknesses and external forces pose severe threats to the survival and success of new ventures. Building from resource-based theory, we first examine and delineate dynamic capabilities from entrepreneurial capabilities in entrepreneurship. We then develop theory to explain how venture capitalists (VCs) endue their ventures with greater dynamic capabilities in order to address these weaknesses and threats. We test our hypotheses on a match-pair sample of VC-backed and non-VC-backed new ventures and find that VC-backed ventures demonstrate greater dynamic capabilities as they relate to product and management development but do not display any greater dynamic capabilities as they relate to legal and government regulation threats. Further analysis also revealed that VC experience and VC reputation were positively related to 1-year stock price returns.     

Signaling in science-based IPOs: The combined effect of affiliation with prestigious universities,underwriters, and venture capitalists

This paper studies the combined effect of affiliation with prestigious universities, underwriters, and venture capitalists on the valuation of biotech ventures at IPO and their post-IPO performance. We argue that affiliation to a prestigious university provides the affiliated firm with a quality signal in the scientific domain. The pure quality signaling effect of the affiliation is isolated from the substantive benefits it provides by performing a difference-in-difference approach based on the scientific reputation of scientists in firms' upper echelons. The signal is stronger the weaker is the scientific reputation of scientists of the focal IPO-firm and is additive to those provided by prestigious venture capitalists and underwriters. Results for a sample of 254 European biotech ventures that went through an IPO between 1990 and 2009 confirm our predictions.     

An examination of the influence of industry structure on eight alternative measures of new venture performance for high potential independent new ventures

This study examined the influence of the structure of new ventures’ entered industries on eight alternative measures of new venture performance for 199 high potential independent new ventures. Each of the 199 entrepreneurial ventures had undertaken an initial public offering (IPO) within the first 6 years of the venture’s founding date and were free of corporate sponsorship or prior corporate parentage.Specifically, this research examined the influence of: (1) stage of the life cycle; (2) industry concentration; (3) entry barriers; and (4) product differentiation on eight alternative measures of new venture performance. The eight measures of new venture performance examined in this research consisted of: (1) change in sales; (2) sales level; (3) net profit; (4) earnings before interest and taxes; (5) return on sales; (6) return on assets; (7) return on invested capital; and (8) return on equity.Most prior research examining the influence of industry structure on new venture performance has: (1) utilized only one or two measures of new venture performance as indicators of the venture’s overall effectiveness and efficiency; (2) often failed to provide theoretical justification for the measure(s) of new venture performance or industry structure examined; and (3) utilized data derived from questionnaires and/or the PIMS data base of corporate-sponsored new ventures. In addition, prior industry structure studies examining independent new ventures have often utilized relatively small sample sizes.This study sought to advance the progress in the field of entrepreneurship with regard to understanding the influence of the structure of new ventures’ entered industries on new venture performance by: (1) examining eight alternative measures of new venture performance; (2) providing theoretical justification for the measures of new venture performance and industry structure examined; and (3) utilizing the largest nonquestionnaire data base of independent new ventures developed to date.This research found that the stage of the life cycle of the venture’s entered industry was the most important determinant of new venture performance among the four industry structural elements examined. Stage of the life cycle had a statistically significant relationship, at a 0.05 level, with the majority of the new venture performance measures examined in this research. In addition, ventures entering industries in the introductory stage of the life cycle achieved the highest levels of venture performance, particularly when compared with those ventures that entered industries in the mature stage of the life cycle.However, this study did not find a statistically significant relationship between stage of the life cycle and change in sales. This suggests that there is a trade-off between profitability and sales growth, and that new ventures that undertake an IPO have a stronger focus on achieving profitable operations rather than sales growth during the initial years after their IPO. This may be due to pressures placed on the new ventures to achieve profitability by the external credit market.Conversely, this research found that: (1) industry concentration; (2) entry barriers; and (3) product differentiation did not have statistically significant relationships, at a 0.10 level, with any of the eight alternative measures of new venture performance examined in this research. However, this research did find that over 90% of the new ventures entered industries characterized by: (1) a low degree of industry concentration and (2) a high degree of product differentiation.The relative absence of new venture entry into industries characterized by: (1) high degrees of concentration and (2) low degrees of product differentiation provides support for prior theory, which suggests that successful entry into such industry environments may be substantially more difficult.In sum, the results of this research suggest that high potential independent new ventures that undertake an IPO should enter industries in the introductory stage of the life cycle. In addition, the results of this research suggest that industries characterized by: (1) relatively low degrees of industry concentration and (2) highly heterogenous products may be necessary but not sufficient conditions for successful entry by high potential independent new ventures seeking to raise equity capital through an IPO.     

Cash crisis in newly public Internet-based firms: an empirical analysis

This study examines why, even when financial resource constraints are significantly relaxed, some new ventures struggle to survive while others prosper. Using the data of approximately 200 new Internet ventures that went public during the years 1997 through 1999, we propose that the performance of new ventures is a function of pre-initial public offering (IPO) characteristics. We determined that firm-level characteristics, including top management team (TMT), financial position, networks, and location, are related to the performance of struggling new ventures. We found strong evidence of agency relationships, so that a substantial reduction in equity holdings by the entrepreneurial team is a strong signal of impending crisis. Interestingly, similar reductions by venture capital (VC) backers did not serve as a signal of crisis.     

Is venture capital worth it? Effects on firm performance and founder returns

This paper extends research on venture capital (VC) finance by studying its effects on a venture's performance and on its founders' returns beyond an initial public offering (IPO). A “founder performance” construct, defined as a founder's financial and nonfinancial returns, is proposed and used to measure and compare returns to founders with returns to investors and firm performance. In general, venture characteristics pre-IPO and venture performance post-IPO were not significantly different when comparing ventures with and without VC backing. Only when VC backing is very high, do pre-IPO resources and funding improve significantly. However, higher levels of resource endowments did not seem to affect post-IPO performance for the venture or its investors. On the other hand, founders resorting to VC funding before taking their company public generated significantly less wealth for themselves and were less likely to remain as CEOs of their ventures after the IPO. Results suggest that founders motivated primarily by wealth creation and those motivated by remaining in control of their ventures should, in both instances, minimize VC backing when taking their ventures public. The finding that founder performance differs from venture and investor performance calls for future research to explore potential conflicts of interest that may arise from the double role of founders as principals and agents.     

Entrepreneurs as prime targets: Insights from Mexican ventures on the link between venture visibility and crime of varying severity

This study addresses entrepreneurs as targets of crime. Leveraging insights from strategic responses to institutional pressures as the main theoretical frame, coupled with supporting insights from routine activities theory and interview data from 14 entrepreneurs who have been victims of crime, we introduce entrepreneur-led ventures becoming targets of crime via their engagement in routine activities that increase venture visibility. We then conceptualize that crime severity pushes entrepreneurs toward venture visibility-reduction responses, such as truncating growth, relocating, or discontinuing the venture. Survey data from 87,486 legally registered entrepreneur-led ventures in Mexico provide strong support for the relationships in our theoretical model. We find that as routine venture activities increase, entrepreneurs encounter crime of increasing severity, with the routine venture activity of making transactions at a bank serving as the strongest attractor of crime. Building on these findings, we observe an indirect effect through crime severity such that the choice to relocate the venture is the most likely response to being targeted by criminals. Our results advance the literature at the intersection of crime and entrepreneurship, especially in developing economies, and offers venture visibility as a mechanism that shapes both criminals' targeting of ventures and entrepreneurs' attempts to reduce being targeted.     

The Effect of Venture Capital Investment—Evidence from China's Small and Medium‐Sized Enterprises Board

In this paper, we use a matched sample to empirically test the effect of venture capital investment on the companies listed on the Small and Medium‐Sized Enterprises Board in China. We find that Chinese venture capitalists neither add value to their invested firms in the initial public offering (IPO) process nor improve operating performance. Rather, compared with their non‐venture‐backed counterparts, venture‐backed firms are associated with a greater level of IPO underpricing and inferior operating performance both before and after IPO. Our findings in China support neither the certification/monitoring hypothesis nor the grandstanding hypothesis, but partly support the adverse selection hypothesis.     

The path-to-profitability of Internet IPO firms

Extant empirical evidence indicates that the proportion of firms going public prior to achieving profitability has been increasing over time. This phenomenon is largely driven by an increase in the proportion of technology firms going public. Since there is considerable uncertainty regarding the long-term economic viability of these firms at the time of going public, identifying factors that influence their ability to attain key post-IPO milestones such as achieving profitability represents an important area of research. We employ a theoretical framework built around agency and signaling considerations to identify factors that influence the probability and timing of post-IPO profitability of Internet IPO firms. We estimate Cox Proportional Hazards models to test whether factors identified by our theoretical framework significantly impact the probability of post-IPO profitability as a function of time. We find that the probability of post-IPO profitability increases with pre-IPO investor demand and change in ownership at the IPO of the top officers and directors. On the other hand, the probability of post-IPO profitability decreases with the venture capital participation, proportion of outsiders on the board, and pre-market valuation uncertainty.     

The Corridor Principle

This article discusses how many entrepreneurs create multiple ventures, and thereby apparently lengthen the duration of their entrepreneurial careers. A new concept, called the Corridor Principle, is proposed as a possible explanation of the multiple venture phenomenon. The Corridor Principle states that the mere act of starting a venture enables entrepreneurs to see other venture opportunities they could neither see nor take advantage of until they had started their initial venture.The Corridor Principle presents an alternative model to the linear single venture career model, embodied by such celebrity entrepreneurs as Ray Kroc of MacDonald' s and Kenneth Olsen of Digital Equipment Corp. Six hypotheses test expectations about the timing and duration of entrepreneurial careers, as well as the relationship between entrepreneurial career length and the creation of multiple ventures.The findings strongly support: • the position that entrepreneurship is a dynamic, multi-venture process for a great many entrepreneurs the rule, rather than the exception. • the existence of a positive correlation between finding at least a second venture and realizing a longer entrepreneurial career. Though there are a variety of explanations for this, and the patterns include both sequential and overlapping ventures, the net effect of creating multiple ventures appears to produce a longer entrepreneurial career. • the position that significant numbers of entrepreneurs create their second venture very early in their entrepreneurial careers especially when contrasted to the group of ex-entrepreneurs, who create multiple ventures (if at all) at a slower rate and later in their careers.Overall, these observations reinforce the notion of the Corridor Principle. Though who can and cannot take advantage of the Corridor Principle is not entirely revealed by the data, some indication exists that an entrepreneurs ability to use Corridor Principle strategy to prolong his or her career is related both to age at startup, and to conscious anticipation and preparation for an entrepreneurial career.The main implications for entrepreneurship practitioners, advisors, researchers, teachers and students are these: Whether studying the entrepreneurial process or planning to start an entrepreneurial career, a long-term view should be taken, one that includes the likely possibility of multiple ventures. The minimum economic returns of earlier ventures can be lower than previously thought if these ventures provide entry to subsequent ventures that possess higher (more acceptable) returns to the entrepreneur. The evidence thus far available indicates that the creation of subsequent ventures occurs relatively quickly when corridors of opportunity become visible and attainable after earlier ventures are established. The likelihood of career failure, as opposed to venture failure, may be lowered if one selects earlier ventures based on their potential to reveal follow-on-venture opportunities that the entrepreneur can investigate and possibly pursue.     

New venture internationalization: The role of venture capital types and reputation

This study examines how different types of venture capital relate to new venture internationalization. Using a sample of 646 U.S. new ventures that executed IPOs between 1995 and 2010, we find that ventures with foreign or corporate venture capital have higher levels of international intensity. We also investigate the moderating role of VC reputation on the relationship between foreign venture capital and international intensity and corporate venture capital and international intensity. Our results suggest that VC reputation weakens the positive relationship between corporate VC and international intensity.     

The relationship between venture capital backing and the top management team quality of firms going public and implications for initial public offerings

We make use of hand-collected data on a large sample of entrepreneurial firms going public to analyze the association between venture capital (VC) backing and the top management team (TMT) quality of firms at the time of their initial public offerings (IPOs), and the effect of both VC-backing and TMT quality on the growth in their post-IPO operating performance and IPO firm valuations. We first show that VC-backing is associated with higher TMT quality. We then show that both higher TMT quality and VC-backing lead to higher growth in post-IPO operating performance and higher IPO valuations. We find that the above two variables affect the growth in post-IPO operating performance through an “ability channel,” whereby the TMTs of such firms choose projects with higher equilibrium scale and implement them more ably. Further, TMT quality and VC-backing affect IPO firm valuations not only through the above ability channel, but also through a “certification channel,” whereby higher TMT quality and VC-backing credibly certify intrinsic firm value to the IPO market, thus reducing the extent of asymmetric information facing such firms in the IPO market and yielding these firms higher IPO valuations. Finally, we show that TMT quality and VC-backing act as complements in their effect on IPO firms' growth in post-IPO operating performance.     

Ownership structure,insider behavior,and IPO performance of SMEs in China

This paper examines the drivers of IPO performance of 783 SMEs in China between 2009 and 2012 that were listed on the SME and Growth Enterprise Boards. The study finds that firms that had prior venture capital (VC) investment did not perform better than those that did not. Among VC-invested firms, ventures (1) with strong VC control rights relative to those of the largest block shareholder, (2) with former ownership affiliation between the VC and the underwriter, and (3) that paid higher IPO fees had a negative long-term performance. The negative relationship between VC-underwriter ownership affiliation and long-term performance decreases as the reputation of the underwriter increases.     

Concentrating Too Hard? Foreign and Corporate Venture Capital Involvement in Syndicates

We investigate the relationship between investment of corporate venture capital (CVC) and foreign venture capital (FVC), and the concentration of investors involved in a financing round. As forms of venture capital distinct from independent venture capital, CVC and FVC can offer different value to new ventures. However, having FVC or CVC investors in the syndicate can also pose additional risks to other investors. We find that a corporate venture capital or a foreign venture capital affiliation is related to lower concentration of investors. Our results suggest that the investors evaluate not only the venture but also their syndicate partners in determining their relative share of round investment.     

How much prestige is enough? Assessing the value of multiple types of high-status affiliates for young firms

Young, unproven firms can signal their worthiness, or potential, through affiliations with various types of prestigious parties. Drawing from signaling theory, we present a formal consideration of the implications of multiple numbers and types of prestigious affiliates for IPO valuations. We argue that different types of prestigious affiliates – prestigious executives, directors, venture capital firms, and underwriters – convey different signals of IPO worth, depending on the extent to which they provide certification or substantive benefits. Based on a sample of 257 software IPOs, we find considerable support for our expectations. The benefits of prestigious executives and directors accumulate in a linear, more is better fashion; in contrast, the payoffs from VC and underwriter prestige accumulate in a curvilinear fashion. We discuss the theoretical implications of these findings and propose an agenda for future research.     

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.     

A dynamic perspective of internal fit in corporate venturing

Managers of corporate parents and their ventures have long been faced with the question of how closely to tie the parent and venture. A close connection may enable a venture to capitalize on the competencies and resources of the parent. However, venture autonomy could prevent corporate inertia and bureaucracy from constraining venture growth.The lack of consensus on this issue leads us to the first of two complementary research questions that we address in this paper: “What is the effect of internal strategic fit between a corporate parent and its venture on venture performance?” We suggest that a tight fit is positively associated with venture performance because of the venture's access to its parent's resources.Managers and researchers alike have often observed that growing enterprises are dynamic entities. In the case of corporate ventures, this implies that the relationship between parent and venture evolves over time. Our second research question directly addresses this issue by asking: “Does the relationship between a corporate parent and its venture(s) evolve over time, and if so, how?”We identify two dimensions of the fit between corporate parents and their ventures: relational and economic. A relational fit reflects organizational culture and structure, while an economic fit is a function of the needs of the venture and the resources of the parent. We develop a series of hypotheses and test them with survey data from 97 Canadian corporate ventures. For the purposes of this study, we define success as the ability of a firm to meet internal milestones on schedule.We find that the degree of fit between a corporate parent and its venture does affect the success of a venture, and that success is associated with high levels of awareness, commitment, and connection. Further, the relational dimension of the parent-venture interface appears to have a greater association with venture success than does the economic dimension.Our data support the idea that the parent-venture relationship is dynamic in nature as ventures in our sample generally lessened their economic connections with their parents as they matured (or vice-versa). We did find, however, that the relational bonds remained more or less intact. The exceptions to these general trends were an increasing emphasis on financial targets along with decreasing CEO involvement as ventures matured. Both of these findings make intuitive sense. Greater financial independence is accompanied by greater financial accountability. And, as a venture gains in both independence and accountability, there is less need for the CEO to provide “air cover.” These two issues aside, the basic model of enduring relational ties and diminishing economic ties was supported. As well, the increasing accountability is consistent with our expectation that a close connection is preferable to high venture autonomy.     

我国沪深A股IPO折价问题再研究

通过普通最小二乘法对我国沪深A股IPO折价现象的多元线性回归分析发现,沪深A股IPO的折价程度不断减弱,定价逐渐趋于理性。实证分析中只有网上超额认购倍数、发行日与上市日之间的间隔期和我国在不同的历史时期采取的不同定价发行方式对IPO折价程度具有统计上的显著性。股票发行定价方式的改变是影响我国A股IPO折价程度高的主要原因。     

Signaling for more money: The roles of founders' human capital and investor prominence in resource acquisition across different stages of firm development

We use signaling theory to explain how new ventures effectively signal future prospects to acquire external resources. Based on a sample of 235 new ventures drawn from a unique dataset combining multiple sources, we examine the signals of founders' human capital (i.e., education, industry experience, and founding experience) and investor prominence and their influence on the amount of external funding received across two stages of venture funding. We find that founders' founding experience and education have the greatest effects for acquiring first-round financing, but in later stages, only the signaling effect from education remains. Furthermore, we find important interactions between founders' human capital and investor prominence in the second round of funding. By utilizing lagged funding information, we show that different types of signals have a dynamic and temporal impact on new ventures' resource acquisition, including the persistence of some signals and the temporariness of others.     

National distances,international experience,and venture capital investment performance

This study examines how the performance of cross-border venture capital investments is affected by national institutional and cultural distances between the environments of venture capitalists (VCs) and investee ventures. We propose that institutional and cultural distances will decrease VCs' effectiveness in conducting venture capital activities and negatively affect investment performance in terms of exit success, and obtain supportive evidence while controlling for geographic distance. We further analyze how VCs can use their international experience to mitigate the negative consequences of national distances. We find that while broad international experience in diverse countries attenuates the deleterious effects of institutional distance in a significant way, it does not have a similar impact in attenuating the negative effects of cultural distance.     

Home country institutions,social value orientation,and the internationalization of ventures

We examined how home country formal institutions and the venture’s value orientation influenced the venture’s likelihood of internationalization based on a data set that was adapted from the Global Entrepreneurship Monitor (GEM) data in the year 2009, covering 7668 individual ventures in 25 countries. Better-developed home country formal institutions are found to have a supportive impact on the venture’s likelihood of internationalization. The supportive impact is also found to be weaker for socially oriented ventures than for profit-oriented ventures. The venture’s social value orientation negatively moderates the home country formal institutions–likelihood of internationalization relationship. The negative moderating effects can be explained as follows: Socially oriented ventures in the better-developed home country institutional environment are less likely to develop coping skills against uncertain and risky institutional environments, which are common in their host countries. Besides the theoretical contributions, this paper also highlights the implications for both business researchers and policy makers.