The performance of venture-backed IPOs in Europe

Abstract

The importance of venture capitalists (VCs) to the success of start-up firms and for economic growth has been well documented in the US. This study investigates the performance of European venture-backed initial public offerings (IPOs) during the period from 1996 to 2010 which includes two stock market cycles and IPO waves. We focus on underpricing (UP) and long-run performance and differentiate between various stock exchanges and firm characteristics. Our findings indicate that venture-backed IPOs generate positive returns for some time after the IPO. This result holds not only for investments in the primary market but also for investments made later on in the secondary market. During the new economy period (1996 to 2003) IPOs have higher UP and first year returns compared to IPOs during the second stock market cycle (2003 to 2010), but in the long run there are no significant performance differences. We also find higher abnormal returns for venture-backed firms that went public on main markets and for larger VC-backed firms for nearly three years after going public. Most importantly, the group of venture-backed IPOs consistently and significantly outperforms a large group of non-venture-backed IPOs. Overall, we provide empirical evidence that venture-backed IPOs in Europe generate positive and superior returns to investors.