Time to Grow Up: Large Sample Evidence on the Maturation Dynamics of Private Venture-backed Firms

Abstract

Using a large quasi-time-series dataset, this paper describes and analyzes how a wide range of the economic characteristics of venture-backed firms change as such firms mature through their private, pre-exit stages of life. Three patterns emerge that I interpret as being consistent with a firm-level interpretation of Gort and Klepper's (1982) theory of the life cycle dynamics of a new industry. First, many firm characteristics evolve as a linear function of the number of venture funding rounds received. This is consistent with venture investors seeing firm maturity in terms of business and/or technological milestones, since meeting milestones is a common requirement for firms to obtain a given round of venture funding. Second, as they mature, firms' revenues per employee and the number of patents granted rise, and the fraction of employees in sales (technical) functions increases (falls). This supports the proposition that venture-backed firms transition from establishing technological milestones to establishing business milestones as they mature. Third, departures from linear maturation tend to occur at the Seed round of funding that precedes the 1st (Series A) round. At the Seed round, managers hold unusually large amounts of equity and their firms are less likely to provide full employee benefits or have adopted formal corporate policies. I interpret this as indicating that venture investors exert their biggest influence at the Series A round and that this influence is permanent, not transitory.