Portfolio Company Performance Research Articles

Aiding philanthropic venture capitalists investing in social enterprises: A multi‐criteria decision‐making approach

AbstractSocial enterprises have emerged as promising solutions for addressing environmental and societal challenges. To enhance their access to financial capital and align their business proposals with the preferences of impact investors, it is crucial to understand how Philanthropic venture capitalists (PhVCs) evaluate potential portfolio companies. This study introduces a framework to assist PhVCs in making more informed investment decisions, fostering successful, long‐term partnerships between investors and investees. The proposed approach begins by determining the significance of investment criteria using the Best‐Worst Method (BWM). Subsequently, the performance of portfolio companies is evaluated, ultimately identifying the most favorable investment opportunities. We apply this framework to a Dutch philanthropic venture capitalist, and our analysis reveals that ‘Potential’ and the ‘Management team’ rank highest in terms of investment criteria importance, while ‘Assessment of the deal’ and ‘External environment’ carry lower significance. Furthermore, our approach, incorporating the BWM outcomes, considers investors' personal preferences and offers a method for ranking portfolio companies based on their value and performance.

Does venture capital improve corporate social responsibility performance?

In recent years, market agents have paid more attention to firm-level sustainable developments, but the economic effects of venture capital on corporate social responsibility (CSR) performance are not clear. We empirically investigated this issue using data from Chinese nonfinancial A-share listed firms between 2010 and 2019. We found that venture capital participation may reduce the CSR performance of portfolio companies (e.g., SMEs), and the quality of internal control (ICQ) is an effective mechanism for venture capital to affect CSR performance. We offer new insights into the relationship between venture capital and CSR in emerging markets.

Government-Backed Venture Capital Investments and Performance of Companies: The Role of Networks

In this paper we analyze how different types of venture capital investments – private, public and indirect public – affect performance of portfolio companies. We use data on more than 20,000 VC deals in Europe between 2000 and 2018 and we hand collected a unique dataset on the institutional setting (public/indirect/private) of almost 3,500 investors. We find that public VC investors perform consistently worse than purely private ones, while indirect public investments (such as the “Juncker Plan” investments) perform consistently better. We link these findings to the fact that public funds do not enter the best performing cliques of investments. On the other hand, indirect funds invest in the VC funds with the best network characteristics, which raises a question of whether indirect VC investments are associated with a high level of windfall gain, and not necessarily improve the value added by the VC funds.

Corporate governance and its effects on perceived performance in Morocco: the mediating role of venture capitalists' strategic and managerial involvement

The current research investigates the effects of the governance relationship between capital-investors and entrepreneurs of financed companies on their perceived performance. For this purpose, two variables related to trust and frequency interaction are taken into consideration. Besides, the mediating role of venture capitalists' strategic and managerial involvement is assessed. The conceptual proposed model is tested in the Moroccan context, via the structural equations' method under the approach of partial least squares (PLS) regression. Results indicate that interaction frequency and trust between stakeholders enhance the performance of the venture capital (hereafter VC)-backed firms. Moreover, interaction frequency and trust are significantly related to the managerial and strategic roles of venture capital firms. Findings highlight also the importance of these strategic roles in improving business performance. However, they do not reveal a direct relationship between managerial VCs' roles and the perceived performance of portfolio companies.

Private Equity Buyouts and Portfolio Company Performance Post-exit

Private Equity Buyouts and Portfolio Company Performance Post-exit

The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.” This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low cost diversified investment vehicles. A new set of agency costs arise because in addition to divergence between the interests of record owners and the firm’s managers, there is divergence between the interests of record owners – the institutional investors – and the beneficial owners of those institutional stakes. The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance. Such investors will be “rationally reticent” – willing to respond to governance proposals but not to propose them. We posit that shareholder activists should be seen as playing a specialized capital market role of setting up intervention proposals for resolution by institutional investors. The effect is to potentiate institutional investor voice, to increase the value of the vote, and thereby to reduce the agency costs we have identified. We therefore argue against recent proposed regulatory changes that would undercut shareholder activists’ economic incentives by making it harder to assemble a meaningful toe-hold position in a potential target.

Venture capital investments and the technological performance of portfolio firms

What is the relationship between venture capitalists’ selection of investment targets and the effects of these investments on the patenting performance of portfolio companies? In this paper, we set out a modelling and estimation framework designed to discover whether venture capital (VC) increases the patenting performance of firms or whether this effect is a consequence of prior investment selection based on firms’ patent output. We develop simultaneous models predicting the likelihood that firms attract VC financing, the likelihood that they patent, and the number of patents applied for and granted. Fully accounting for the endogeneity of investment, we find that the effect of VC on patenting is insignificant or negative, in contrast to the results generated by simpler models with independent equations. Our findings show that venture capitalists follow patent signals to invest in companies with commercially viable know-how and suggest that they are more likely to rationalise, rather than increase, the patenting output of portfolio firms.

Changing the Business Model: Effects of Venture Capital Firms and Outside CEOs on Portfolio Company Performance

This study extends extant research on business model change by examining the impact of venture capital firms (VCFs) on the performance of young ventures that have substantially changed their business model. The analysis, using a unique dataset of 163 venture capital‐backed portfolio companies (PFCs), reveals a positive relationship between the scope of VCF involvement and PFC performance. Furthermore, the VCFs' experience with business model change and the recruitment of an outside CEO to the PFC both increase the positive impact of VCF involvement. These findings have implications for theory and practice. Copyright © 2014 Strategic Management Society.

Investors as Capabilities: Intra-Investor Complementarities and Startup Performance

The contribution of investors to the performance of their portfolio companies within the VC industry has been researched thoroughly. A novel aspect of this paper is that it examines the impact of a syndicated investment using two different measures: (a) the total number of investors; and (b) the total number of different investor types. Using a novel dataset and while controlling for the endogeneity, this paper finds that having more investors of the same type has a positive curvy-linear impact on the portfolio company's performance. However, a larger number of investor types has only a positive linear impact on the company's performance. It is suggested that a tradeoff between having more investor complementarities and increased coordination costs is the driving mechanism of these results.

Active Involvement of Private Equity Firms in Portfolio Companies and its Performance Effects

Private equity firms are characterized by active involvement in their portfolio companies. A key question in the literature on buyouts is the one of whether involvement of private equity firms increases the performance of portfolio companies i.e., whether active ownership adds value. Using partial least squares structural equation modeling, this paper analyses a data set consisting of survey data on 271 European portfolio companies and complementary secondary data on 31 portfolio com-panies. We find that active involvement is significantly associated with performance increases in portfolio companies. On the one hand, private equity firms can add value through governance mechanisms which control and incentivize top managers of portfolio companies to increase mana-gerial and organizational efficiency. These findings are in line with the long established agency-based view on buyouts and private equity firms. On the other hand, our results reveal that private equity firms can add value beyond a reduction of agency conflicts. The provision of strategically relevant resource shows to improve the competitive position and performance of portfolio compa-nies. The provision of resources is in particular driven by the skills and capabilities of the private equity firm’s representatives on a portfolio company’s board and their personal and institutional networks. This more entrepreneurial perspective on value addition helps to extend the classic effi-ciency-based view buyouts and private equity firms.

Managing Institutional Logics: The Effects of Investors’ Social Capital on Venture Performance

How do institutions affect entrepreneurial choices? This paper examines this question in the context of how new venture investors use institutional logics to manage their social capital with consequences for their portfolio company performance. An ongoing debate is whether the benefits of network closure are achieved at the expense network brokerage, that is sparse networks rich in structural holes; and how these two network forms may be compatible. We propose that the benefits of social capital to entrepreneurial returns function differently under community versus market institutional logics, which represent different mechanisms for motivating relationships. Higher entrepreneurial returns accrue when venture investors exhibit a community logic at the seed stage of development of their portfolio companies, identified with network closure; and a market logic at the later stage of development, identified with network brokerage. Venture investors that failed to align their social capital logic to evolving risk and resource challenges over the life cycle of their portfolio companies exhibited lower entrepreneurial returns. These arguments are developed and tested using interview and event history data on U.S. venture capital investors and their portfolio companies from 1980 to 2009. Implications of integrating literature on institutional theory, social capital, and entrepreneurship are discussed.

Coaching or Selection? Venture Capital and Firms’ Patenting Performance

In the process of new firm growth different types of capabilities are deployed in the pursuit of entrepreneurial opportunities. In this paper we investigate the role of coaching vs. selection capabilities of venture capitalists in the patenting performance of portfolio companies. We develop simultaneous models that predict the likelihood that firms attract venture capital, the likelihood that they patent and the number of patents applied for and granted. When estimating simple models with independent equations, we find evidence of a positive impact of venture capital on patenting; but if we account for endogeneity of venture capital investments, this effect becomes insignificant or negative. Our results show that venture capital follows patent signals to invest in companies with commercially viable know-how and that, as far as the patenting performance of firms is concerned, the selection function of venture capital is stronger than its coaching function.

Trust Between Entrepreneurs and Angel Investors

The study of trust-related outcomes has had a long tradition in the organizational literature. However, few have considered potential darker sides of trust or have explored its effects in the setting of entrepreneurial ventures. This study does so by examining how perceptions of entrepreneurs and angel investors concerning the degree of trust in their relationship impact the latter’s assessments of venture performance. Hypotheses are tested using survey data from the lead entrepreneur and angel investor of 54 ventures. Results indicate that angel investors evaluate portfolio company performance more positively when they perceive high trust, whereas entrepreneurs’ trust perceptions are negatively associated with angel investors’ assessments of venture performance. Further, these effects are partially mediated by the quality of information exchanges between both parties. Together, these findings point to the benefits as well as threats that come with the presence of strong trust in entrepreneur–angel investor relationships.

Business Model Change Effectiveness in Venture Capital-Backed Ventures

Drawing on learning theory, the attention-based view of the firm, and decision-making literature, this study examines the impact of venture capital firms (VCFs) on the performance of ventures that have undergone a change in their business model. Unique primary and secondary data obtained from 156 venture capital–backed portfolio companies (PFCs) reveal a curvilinear relationship between VCFs’ investment focus on business model change and PFC performance. Up to a certain point, increased investment focus enhances PFC performance; beyond that point, further increases in investment focus reduce PFC performance though. The addition of new managers not only increases PFC performance but also moderates the curvilinear relationship between VCF investment focus and PFC performance. These results have important implications for theory and practice.

Beyond Agency Theory: Resource-based value creation by private equity firms

A central issue in research on buyouts is the question of whether private equity firms can take actions during the holding period of a private equity investment which add value to their portfolio companies through improvements in operating performance. Our analysis of unique survey data on 271 European buyouts using partial least squares structural equation modeling indicates that private equity firms can add value not only through governance mechanisms which control and incentivize top managers of portfolio companies to increase organizational efficiency, but, interestingly, also by providing them with access to strategic resources to generate competitive advantage. In particular, the human resources of private equity firm’s representatives who serve on the supervisory board and the network of private equity firms have a positive impact on the operating performance of portfolio companies. By taking a dual theoretical perspective and by supplementing established agency-theoretic logic with arguments from resource-based theory to develop our hypotheses, this article helps to advance the theoretical discussion on value creation through private equity firms beyond the dominant perspective of agency theory.

Mutual Fund Skills and the Performance of Corporate Acquirers

Existing corporate governance research interprets positive correlation between institutional ownership and the success of mergers as evidence of active monitoring by institutional investors. The possibility that some institutional investors may have merely picked stocks that make better acquisitions is acknowledged but not investigated. This study examines stock picking on acquirers by actively managed equity mutual funds. Using different proxies for fund skills, we show that acquirers held by the most skilled funds just prior to an acquisition experience significantly better stock performance and operating performance after the merger. In the year preceding the acquisition announcement, higher-skill funds increase their holdings of the most successful acquirers and decrease their holdings of least successful acquirers. Moreover, using Active Share as a proxy for stock picking, we show that more active funds decrease holdings in all acquirers, but the decrease is largest for the least successful acquirers. The link between fund skill and post-merger performance of portfolio companies is not attributable to better monitoring by high-skill funds. Overall, these results provide strong evidence that skilled mutual funds pick the stocks of firms that subsequently make better acquisitions.

Private equity portfolio company performance during the global recession

We assess the recent economic and financial performance of U.K. private equity (PE) backed buyouts. Our empirical evidence, which is based on thousands of transactions, reveals that PE-backed buyouts achieved superior economic and financial performance in the period before and during the recent global recession, relative to comparable firms that did not experience such transactions. Our regression results imply positive differentials of 5–15% in productivity and approximately 3–5% in profitability for buyout firms, relative to non-buyout firms. Another key finding is that revenue and employment growth for PE- backed firms were positive during the sample period.

The Role of Human Capital in Venture Capital

This paper analyzes the role venture capitalist human capital plays in the performance of their portfolio companies. Using information on the educational and work histories of the individual venture capitalists who take board seats with their portfolio companies, I examine the propensity for a portfolio company to exit, via IPO or acquisition, as a function of the characteristics of its VC board members. In doing so, I test several hypotheses about which VC board member human capital characteristics matter for investment performance. I find that VC board members with past executive management experience sit on the boards of companies more likely to exit, consistent with the hypothesis that VCs who have skill in management can help their companies grow. I also find that VC board members with past non-venture finance experience are on the boards of companies more likely to exit when these companies are later stage and buyout deals. This is consistent with financial expertise being needed in restructuring and obtaining more capital for older and larger firms. I also find that companies in certain specialized sectors, such as biotech, are more likely to exit when their VC board members have advanced degrees in sector-relevant fields, consistent with the hypothesis that specialized product knowledge helps a VC identify good investments and advise product development. The use of supply-side instrumental variables for VC board member human capital supports a causal, or value-added, interpretation of the impact of VC executive management experience, finance experience and specialized knowledge on portfolio company performance. Finally, I examine the relation between VC board member age and company performance and birth year and company performance. I find that VCs who graduated from college in a recession sit on the boards of companies more likely to exit. This result is consistent with the negative career consequences of starting work in a downturn and evidence of a reverse adverse selection effect of starting a career in a downturn.

Venture Capital Reputation: A Survey

For financial intermediaries that operate in a highly fragmented industry, such as venture capital (VC) firms, reputation is highly valuable in building credibility with entrepreneurs and investors and enhancing business relationships. A strong reputation benefits both a VC firm’s investors and principals and its portfolio companies by making exits from venture investments more profitable and likely. In this survey piece, we compare the associations of a variety of alternative reputation measures for the lead (largest) investor in the VC syndicate with the VC’s portfolio company performance measured by the probability of future IPOs and post-IPO long-run performance metrics. We examine the following VC reputation measures: 1) a VC’s market share of all venture backed IPOs in the immediately preceding 3 calendar years; 2) the number of completed IPOs in a VC’s portfolio over the prior 3 calendar years relative to the number of companies it actively invested in; 3) the value-weighted proportion of a VC’s IPO investments relative to its total investments; 4) the age of a VC firm; 5) the capital under a VC firm’s management; and 6) a VC firm’s total investment in portfolio firms. We document that past IPO success measured by the first three VC reputation measures above have significant predictive power for subsequent IPO success. Importantly, only the first reputation measure, VC IPO Market Share, has significant explanatory power across all the post-IPO long-run performance measures we examine, while the other VC reputation measures are sometimes significant. This result holds even after controlling for selection bias. We also find two variants of VC IPO Market Share, the cumulative IPO market share measure and the average of the VC syndicate IPO market share measure, yield qualitatively similar, albeit weaker, associations with long-run post-IPO performance measures. An appendix to this survey lists the 1000 most reputable VCs and their year-by-year VC IPO Market Share reputation measure for use in future studies.

Alma Mater Matters: The Value of School Ties in the Venture Capital Industry

Alma mater matters: The value of school ties in the venture capital industry. This paper examines the role and estimates the economic value of social networks tied to academic institutions in the venture capital industry. I show that having a shared academic background increases the likelihood of matching between entrepreneurs and venture capitalists by 57%. Similarly, a shared academic background increases the likelihood of matching between different venture capitalists by 42% when they syndicate portfolio company investments. Finally, a shared academic background improves portfolio company performance. For example, when an entrepreneur and a venture capitalist attended the same Top 3 academic institution, the likelihood that the investment will result in an initial public offering or acquisition increases by 42%. This is the incremental effect of having attended the same Top 3 academic institution. Taken together, these results provide strong evidence that shared academic backgrounds help reduce information gaps in the venture capital industry.Unveiling the secrets of the academy: Alumni networks and university endowment success. This paper shows that when university endowments become limited partners with venture capital firms, the performance of their connected portfolio companies improve relative to non-connected ones. Portfolio companies are connected when any of their entrepreneurs attended the corresponding universities for undergraduateor graduate studies. In a differences-in-differences design I compare initial public offering rates between connected- and non-connected venture capital investments in a treated- and an untreated cohort and estimate this effect to be 6%. Since the unconditional sample mean of initial public offerings is 10%, this is commensurate to a 60% increase in the unconditional initial public offering probability. This effect consists of two separate and potentially different effects, however. First, the effect of obtain a new university endowment as a limited partner, second, the effect of losing an already existing university endowment as a limited partner. Further analysis shows that the main effect is mostly driven by the latter. These results continue to hold in a rich set of robustness checks.Goldrush Dynamics of Private Equity. We present a simple dynamic model of entry and exit in a private equity market with heterogeneous fund managers, a depletable stock of target companies, and learning about investment profitability. Its predictions match a number of stylized facts: Aggregate fund activity follows waves with endogenous transitions from booms to busts. Supply and demand in the private equity market are inelastic, and the supply comoves with investment valuations. High industry performance precedes high entry, which in turn precedes low industry performance. Differences in fund performance are persistent, firsttime funds underperform the industry, and the first-time funds that are raised in boom periods are unlikely to be succeeded by follow-on funds. Fund performance and fund size are positively correlated across private equity firms, but negatively correlated across consecutive funds by the same firm. Finally, boom periods can make ”too much capital chase too few deals”.Ownership Matters: A Clinical Study of Investor Activism. This paper studies the involvement and engagement objectives of an activist investor in an institutional environment characterized by concentrated ownership. It highlights the heterogeneity of the investor’s activism and its focus on operational improvements. It emphasizes the ownership structure of the portfolio companies as important determinants of investor activism. Using a carefully selected set of peer companies, it is possible to show that the investor targets undervalued companies with operational slack that maintain open ownership structures. In particular, by avoiding to invest in companies with other active owners, e.g. families and industrial owners, and seeking to invest in companies with more institutional holdings, the investor ensures that there is not only scope for improvements. There is also a reasonable chance of exercising control.