Is there a puzzle in the failure of venture capital backed portfolio companies?

Abstract

We examine the post-Initial Public Offering (IPO) role of Venture Capitalists (VCs) in their portfolio companies’ failures, employing a LOGIT analysis of a matched pair sample of defunct and successful VC-backed companies, and an Ordinary Least Square (OLS) analysis of the lifespan of the defunct set. We find that the reputation and experience of VCs are major factors in extending the lifespan of the defunct portfolio companies. We also find that VC monitoring, experience, reputation and percentage ownership are not significant factors to differentiate between failure and success. VCs are associated with high risk investments making failures inevitable, but surprisingly we find no credible reasons that are related to VCs’ financial management for failures.