Do VCs matter? the importance of owners on performance variance in start‐up firms

Adding to the corporate effect literature, we study the effect of owners on firm performance in a new context, that of venture capital firms (VCs) and the start-up firms in which they invest. After discussing the effect that VC ownership can have on start-ups, we estimate that start-up-specific, owner (VC), and year effects account for significant variance in performance (26.3 percent, 11.2 percent and 3.7 percent, respectively). The effects of industry and investment stage are not statistically different from zero. We also provide an analysis that separates the owner effect into two components: a selection component—which impacts investment—and a management component—which explains significant variance in performance. By examining the owner effect in a different institutionalized form of governance—that of the start-up and its relationship to VC owners—our study also contributes to an understanding of the ‘ownership’ effect in the strategy literature more generally. Copyright © 2008 John Wiley & Sons, Ltd.

[1]  Dean A. Shepherd,et al.  Venture Capitalists' Assessment of New Venture Survival , 1999 .

[2]  Constance E. Helfat,et al.  Does corporate strategy matter , 2001 .

[3]  Gerald F. Davis,et al.  Organization Theory and the Market for Corporate Control: A Dynamic Analysis of the Characteristics of Large Takeover Targets, 1980-1990 , 1992 .

[4]  Vance H. Fried,et al.  Toward a Model of Venture Capital Investment Decision Making , 1994 .

[5]  L. Zucker.  Institutional Theories of Organization , 1987 .

[6]  O. Williamson.  / STRATEGIZING, ECONOMIZING, AND ECONOMIC ORGANIZATION , 1991 .

[7]  Vance H. Fried,et al.  An Entrepreneur's Guide to the Venture Capital Galaxy , 2006 .

[8]  Joel A. C. Baum,et al.  Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups , 2004 .

[9]  Robert Jacobson,et al.  The recency of technological inputs and financial performance , 2008 .

[10]  Mary Louise Hatten,et al.  Strategic groups, asymmetrical mobility barriers and contestability , 1987 .

[11]  Paul A. Gompers.  Optimal Investment, Monitoring, and the Staging of Venture Capital , 1995 .

[12]  R. Jennrich,et al.  Unbalanced repeated-measures models with structured covariance matrices. , 1986, Biometrics.

[13]  D. Teece.  ECONOMIES OF SCOPE AND THE SCOPE OF THE ENTERPRISE , 1980 .

[14]  R. Rumelt.  How much does industry matter , 1991 .

[15]  Paul A. Gompers,et al.  The Venture Capital Revolution , 2001 .

[16]  Anita M. McGahan,et al.  What Do We Know About Variance in Accounting Profitability? , 2002, Manag. Sci..

[17]  G. Vining,et al.  Data Analysis: A Model-Comparison Approach , 1989 .

[18]  J. Barney.  Types of Competition and the Theory of Strategy: Toward an Integrative Framework , 1986 .

[19]  Karel Cool,et al.  Asset stock accumulation and sustainability of competitive advantage , 1989 .

[20]  VENTURE CAPITALISTS AND INFORMATION ASYMETRIES IN THE PRICING OF IPO SECURITIES. , 2003 .

[21]  Morten Sorensen,et al.  How Smart is Smart Money? A Two-Sided Matching Model of Venture Capital , 2006 .

[22]  M. Porter,et al.  HOW MUCH DOES INDUSTRY MATTER, REALLY? , 1997 .

[23]  R. Schmalensee.  Do Markets Differ Much , 1984 .

[24]  Harry J. Sapienza,et al.  When do venture capitalists add value , 1992 .

[25]  Alexander Ljungqvist,et al.  Whom You Know Matters: Venture Capital Networks and Investment Performance , 2007 .

[26]  Paul A. Gompers.  Grandstanding in the venture capital industry , 1996 .

[27]  Antoinette Schoar,et al.  Private Equity Performance: Returns, Persistence and Capital Flows , 2003 .

[28]  James A. Brickley,et al.  The Market for Corporate Control: The Empirical Evidence Since 1980 , 1988 .

[29]  Per Strömberg,et al.  Venture Capitalists as Principals: Contracting, Screening, and Monitoring , 2001 .

[30]  W. Sharpe.  CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK* , 1964 .

[31]  Garry D. Bruton,et al.  Strategy and the board of directors in venture capital-backed firms , 1998 .

[32]  Harbir Singh,et al.  Corporate and industry effects on business unit competitive position , 2000 .

[33]  J. Pound.  Raiders, Targets, And Politics: The History And Future Of American Corporate Control , 1992 .

[34]  M. Mizruchi,et al.  The Social Construction of Organizational Knowledge: A Study of the Uses of Coercive, Mimetic, and Normative Isomorphism , 1999 .

[35]  Lowell W. Busenitz,et al.  Reconsidering the venture capitalists' “value added” proposition: An interorganizational learning perspective , 2004 .

[36]  W. A. Sahlman,et al.  What do venture capitalists do , 1989 .

[37]  J. Lintner.  THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS , 1965 .

[38]  Anat R. Admati,et al.  Robust Financial Contracting and the Role of Venture Capitalists , 1994 .

[39]  Per Strömberg,et al.  Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts , 2000 .

[40]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[41]  Per Strömberg,et al.  Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses , 2002 .

[42]  Paul J. Verdin,et al.  IS PERFORMANCE DRIVEN BY INDUSTRY- OR FIRM-SPECIFIC FACTORS? A NEW LOOK AT THE EVIDENCE , 2009 .

[43]  J. Mossin.  EQUILIBRIUM IN A CAPITAL ASSET MARKET , 1966 .

[44]  J. Liebeskind.  Internal Capital Markets: Benefits, Costs, and Organizational Arrangements , 2000 .

[45]  W. Baumol,et al.  Contestable Markets and the Theory of Industry Structure , 1982 .

[46]  M. Gordon,et al.  PUBLICATION RECORDS AND TENURE DECISIONS IN THE FIELD OF STRATEGIC MANAGEMENT , 1996 .

[47]  R. Grant.  Toward a Knowledge-Based Theory of the Firm,” Strategic Management Journal (17), pp. , 1996 .

[48]  D. Shepherd,et al.  Human capital theory and venture capital firms: exploring “home runs” and “strike outs” , 2005 .

[49]  Josh Lerner,et al.  Venture Capitalists and the Oversight of Private Firms , 1995 .

[50]  Raphael Amit,et al.  Venture‐Capital Syndication: Improved Venture Selection vs. The Value‐Added Hypothesis , 2002 .

[51]  Shige Makino,et al.  Does country matter , 2004 .

[52]  William D. Bygrave,et al.  Venture capital at the crossroads , 1992 .

[53]  Thomas H. Brush,et al.  The relative influence of industry and corporation on business segment performance: an alternative estimate , 1999 .

[54]  William L. Megginson,et al.  Venture Capitalist Certification in Initial Public Offerings , 1991 .

[55]  Manju Puri,et al.  Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence , 2000 .

[56]  B. Wernerfelt,et al.  A Resource-Based View of the Firm , 1984 .

[57]  David H. Hsu.  What Do Entrepreneurs Pay for Venture Capital Affiliation? , 2002 .