Venture capital (VC) is one of the most suitable financing modes for young high-tech entrepreneurial firms to raise external capital. However, VC investors (VCs) are heterogeneous and differ along several dimensions. One of the most important of these dimensions is the type of ownership and governance, because of its strong influence on VCs’ objectives and investment behaviour, and on the value investors can add to portfolio firms.
In our paper – Venture capital Investments in Europe and portfolio firms’ economic performance: independent versus corporate investors – we focus on independent and corporate VCs (IVCs and CVCs), the two VC types that have attracted most scholarly attention.
First, both IVC and CVC investments have a large positive impact on portfolio firms’ overall economic performance*. The estimated magnitude of the performance increase attributable to IVC and CVC investments is 41% and 50% respectively. Conversely, investments syndicated by both IVCs and CVCs do not lead to any increase in portfolio firms’ performance.
The second contribution of this work is the investigation of the dynamics of portfolio firms’ performance improvements. Our results show that the short-term performance impact of IVC investments is positive – its estimated magnitude is 26%. In the long term, both IVC and CVC investments have a statistically significant and economically relevant effect on portfolio firms’ overall economic performance – 58% and 67% respectively).
The third contribution is the inspection of the channels through which IVC and CVC investments improve the portfolio firms’ overall economic performance. The estimated long-term effects on real sales growth are equal to 67% and 58%, respectively. IVC investments also result in a significant short-term real sales increase (36%), which is larger than the short-term real sales increase engendered by CVC investments (18%).
As to the input side, we highlight an important difference between IVCs and CVCs. IVC backing leads to an increase in headcount and real payroll expenses, whose magnitude is smaller than that of the increase in real sales value. Moreover, such increases materialise in the short term – 21% and 19% respectively – whereas after the second year following the first VC round, we record no additional effect of IVC on headcount and real payroll expenses, and no impact on real fixed assets is observed. As to CVC investments, we do not observe any significant effects on real payroll expenses, headcount, and real fixed assets either in the short term or in the long term.
Data on both VC-backed and non-VC-backed European high-tech firms are drawn from a new longitudinal firm-level dataset from 1992 to 2010 —the Vico dataset built by the 7th Framework Program Vico project promoted by the European Commission.
This is an abstract of an article published in The Journal of Economics and Management Strategy