Does staying private longer affect innovation of VC-backed IPOs and outcomes of VC investments?

Abstract

This paper studies how staying private longer plays a role in the innovation of VC-backed IPO companies and the outcomes of VC investments. I find that without public short-termism of targeting short-term earnings, companies staying private longer can enhance their innovation productivity through VC support prior to IPOs. The effects of staying private longer on post-IPO innovation activities for VC-backed companies depend on their pre-IPO innovation performance. Based on superior innovation productivity before IPOs, all more innovative companies encounter pressure from the stock market and thus have similar performance in post-IPO innovation, which is unrelated to how long they stay private. In contrast, depending on poor innovation productivity preceding IPOs of less innovative companies, going public earlier has a favorable effect on the post-IPO quantity and quality of innovation outputs. I provide new evidence that rather than realizing benefits from rapidly pursuing IPOs for portfolio companies, VCs are motivated to back their portfolio companies to stay private longer due to the upside potential of backing more innovative companies, while VCs could face the risk of losing reputation by backing less innovative companies.