How Does Venture Capital Experience Affect Portfolio Firm's Long-Run Performance?

Abstract

This study examines if and how does venture capital’s experience, as measured by venture capital age, specialization and historical investment influence post-IPO performance and growth of firms. We find that venture capital experience has significant positive effects on long-run performance measures, even after controlling for venture capital selectivity. In addition, we find that VC-backed firms exhibit better corporate governance mechanisms. Those firms have significantly higher probability of allocating ownership to senior executives than non-venture backed firms and are able to better align the interests of the executives and the shareholders. In addition, venture backed firms are associated with more independent directors, and have less duality and ownership concentration problems. Identification concerns are addressed by using instrumental variables. Our work supports the bulk of value that VC adds is the result of VC monitoring and involvement in corporate governance. Hence, we contribute to the literature on corporate finance and corporate governance in emerging markets by examining the impact of institutions.