Venture Capitalists and Innovation in Mature Public Firms

Abstract

By using an original hand-collected data on the professional backgrounds of board members of S&P 500, S&P MidCap and SmallCap companies, this paper presents evidence on the role of venture capitalists (VCs) in mature public companies long time after their initial public offering (IPO). We find that 30.5% of S&P firms, which have gone public almost 20 years ago, have at least one VC director on their board, suggesting that VCs' governance role extends from newly public firms to mature public firms. VCs' presence as board members is not only limited to public firms which were VC-backed at the time of their IPO. 34.8% of the firms with VC directors were not VC-backed at the time of their IPO. We find that firms with VC directors on board exhibit greater research and development (R&D) and innovation activity measured by their patenting output. There is also a significant difference in the acquisition activity of firms with VC directors and firms with no VC directors. Firms with VC directors acquire smaller, more R&D intensive and VC-backed targets. They also exhibit a greater amount of corporate venture capital (CVC) investment and form a greater number of joint ventures and strategic alliances with VC-backed firms than firms with no VC directors. Overall, this paper provides the first piece of evidence that, in addition to their role as providers of finance, monitoring and advice for small private firms, VCs also play a significant role in mature public firms, especially in promoting the R&D and innovation activity in such firms.