The Causes and Consequences of Venture Capital Stage Financing

This paper examines the causes and consequences of venture capital (VC) stage financing. Using information about the physical location of an entrepreneurial firm and the geographic distance between the VC investor and the firm, I show that VC investors located farther away from an entrepreneurial firm tend to finance the firm using a larger number of financing rounds, shorter durations between successive rounds, and investing a smaller amount in each round. However, VC investors' propensity to stage is independent of whether the firm is located in a close-knit community. I also find that VC staging positively affects the entrepreneurial firm's propensity to go public, operating performance in the initial public offering (IPO) year, and post-IPO survival rate, but only if the firm is located far away from the VC investor. However, the effect of VC staging on entrepreneurial firm's performance is independent of whether it is located in a close-knit community. The findings are robust to a variety of alternative proximity measures, instrumental variables, and econometric approaches for dealing with endogeneity problems.

[1]  Karthik Krishnan,et al.  How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface , 2011 .

[2]  William A. Sahlman,et al.  ASPECTS OF FINANCIAL CONTRACTING IN VENTURE CAPITAL , 1988 .

[3]  O. Hart,et al.  A Theory of Debt Based on the Inalienability of Human Capital , 1991 .

[4]  Mike Wright,et al.  The syndication of venture capital investments , 2001 .

[5]  M. Petersen,et al.  Does Distance Still Matter? The Information Revolution in Small Business Lending , 2000 .

[6]  Jun-Koo Kang,et al.  The Geography of Block Acquisitions , 2007 .

[7]  Morten Sorensen,et al.  How Smart is Smart Money? An Empirical Two-Sided Matching Model of Venture Capital , 2003 .

[8]  Bruce D. Phelps.  Money Chasing Deals? The Impact of Fund Inflows on Private Equity Valuations , 2000 .

[9]  Thomas J. Chemmanur,et al.  IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists , 2010, Journal of Financial and Quantitative Analysis.

[10]  W. A. Sahlman,et al.  The structure and governance of venture-capital organizations , 1990 .

[11]  Donald W. K. Andrews,et al.  Identification and Inference for Econometric Models , 2005 .

[12]  Sunil Wahal,et al.  Grandstanding, certification and the underpricing of venture capital backed IPOs , 2004 .

[13]  Christopher J. Malloy,et al.  The Geography of Equity Analysis , 2003 .

[14]  Darwin V. Neher.  Staged Financing: An Agency Perspective , 1999 .

[15]  Rajarishi Nahata,et al.  Venture Capital Reputation and Investment Performance , 2008 .

[16]  Malcolm P. Baker.  Career Concerns and Staged Investment: Evidence from the Venture Capital Industry , 2000 .

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

[18]  S. Ravid,et al.  The Geography of Venture Capital Contracts , 2009 .

[19]  J. K. Morris,et al.  Pratt's Guide to Venture Capital Sources , 1989 .

[20]  J. Heckman.  Sample selection bias as a specification error , 1979 .

[21]  Allen N. Berger,et al.  Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks , 2002 .

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

[23]  D. Bergemann,et al.  Venture capital financing, moral hazard, and learning , 1998 .

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

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

[26]  J. Lerner.  Comment on Bergemann and Hege , 1998 .

[27]  W. Greene.  Sample Selection Bias as a Specification Error: Comment , 1981 .

[28]  Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance , 2005 .

[29]  X. Tian.  The Role of Venture Capital Syndication in Value Creation for Entrepreneurial Firms , 2012, Review of Finance.

[30]  Paul A. Gompers,et al.  Buy local? The geography of venture capital , 2010 .

[31]  Joshua D. Coval,et al.  The Geography of Investment: Informed Trading and Asset Prices , 1999, Journal of Political Economy.

[32]  Paul A. Gompers,et al.  Money chasing deals? The impact of fund inflows on private equity valuation , 2000 .

[33]  Paul A. Gompers,et al.  The venture capital cycle , 1999 .

[34]  Yael V. Hochberg,et al.  Whom You Know Matters: Venture Capital Networks and Investment Performance , 2004 .

[35]  James C. Brau,et al.  The Choice of IPO versus Takeover: Empirical Evidence* , 2003 .

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

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

[38]  Susheng Wang,et al.  Staged Financing in Venture Capital: Moral Hazard and Risks , 2002 .

[39]  Simi Kedia,et al.  Geography and Acquirer Returns , 2005 .

[40]  Na Dai,et al.  Local Bias in Venture Capital Investments , 2009 .

[41]  Tobias J. Moskowitz,et al.  Home Bias at Home: Local Equity Preference in Domestic Portfolios , 1999 .

[42]  Toby E. Stuart,et al.  Syndication Networks and the Spatial Distribution of Venture Capital Investments1 , 1999, American Journal of Sociology.

[43]  Daniel A. Ackerberg,et al.  Endogenous Matching and the Empirical Determinants of Contract Form , 2001, Journal of Political Economy.

[44]  L. Bottazzi,et al.  Who are the active investors? Evidence from venture capital , 2008 .

[45]  Alexander W. Butler,et al.  On the Matching of Companies and Their Financial Intermediaries: Evidence from Venture Capital , 2008 .

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