Do Venture Capitalists' Characteristics Affect the Performance of the Firms They Back?

Abstract

Previous research has already addressed the issue of the impact of venture capital (VC) backing on the growth patterns of investee firms. Based on qualitative, hand-collected data, other studies analyzed the different tasks performed by venture capitalists (VCs) to add value to their portfolio companies. The aim of this paper is to provide evidence of the effect of some VCs’ characteristics on the performance of the portfolio firms over time. The characteristics tested are: age of the VCs, size of the funds under management, number of portfolio companies per investment manager and specialization strategy. We base our analysis on a highly representative, unbiased sample of VC-backed firms in a country that ranks third in the Continental Europe VC market. The sources of data are two databases, one reporting VC activity and the second one including financial accounts of the firms. Additionally, historical and observable VCs’ characteristics have been added. The findings are based on panel data methodology, analyzing several years of financial results, from the year of the first round of financing, for each VC-backed firm. This approach allows us to keep track of the changes over time and to control for the effect of the money invested and the value added by VCs separately. We analyze the whole sample and three subsets based on the portfolio company stage. Our findings show that value added is significant in companies at the expansion stage for some VCs characteristics, such as age, size or number of portfolio companies per investment manager, whereas performance on start-up companies seems related to funding alone.