The venture capital advantage in technology firms: An IPO analysis

Abstract

The goal of this research is to investigate the level of influence venture capital (VC) firms have on their technology portfolio companies’ public shares after their initial public offering (IPO). While there has been substantial research within the certification roles that underwriters and auditors take to ameliorate the information asymmetry problem, we seek to employ a similar framework within a VC-backing context. VCs invest significant time and resources to choose companies they back as their success is further linked to their return and esteem of the fund and partners. Their reputation is often described as an ‘intangible’ asset used to indicate their unobserved abilities and create expectations for the future. We first quantify this intangible asset of reputation, and then we analyse how the reputation impacts the post-IPO market performance in the short-term and long-term through their certification and reputation effects through econometric methods. While we do not find strong evidence that there exists a significant signalling effect from the backing of reputable VCs in the long-term, we do find evidence of moderate significance in the initial returns. Our findings appear to be in line with existing literature and complement the recent shift in dynamics we observe in the VC ecosystem.