Public Market to Private Market: Institutions in Venture Capital

Abstract

Institutions that traditionally focus on the public equity market are making an increasing number of venture capital (VC) investments in the private market. This paper investigates this phenomenon and finds that an institution-backed entrepreneurial firm is more likely to have a successful exit, either through an IPO or through an acquisition. These institution-backed entrepreneurial firms also tend to be more mature, require higher amount of financing and attract more reputable VC investors. Our baseline results continue to hold in a propensity score matching analysis. Further analysis indicates a strong positive association between prior public equity market performance of an institution and successful exit of entrepreneurial firms backed by the institution. Finally, we present evidence consistent with the hypothesis that institutions contribute to the successful exits of entrepreneurial firms through the certification effect.