VC-backed Startups Research Articles

Impact orientation and venture capital financing: The interplay of governmental, social impact and traditional venture capital

In addition to traditional venture capital (VC), governmental VC and social impact VC investors have emerged as alternatives to fund entrepreneurial ventures, especially start-ups that incorporate social and/or environmental objectives into commercial operations. Using a sample of 15,510 VC-backed start-ups, we show that impact-oriented ventures are more likely to receive funding from alternative VCs. Both social and environmental orientations increase the chances that a start-up secures funding from impact VCs while social orientation drives results for government VCs. Importantly, we also show that impact-oriented ventures are more likely to secure investment from traditional VCs when impact and governmental VCs co-invest.

The labor effects of R&D tax incentives: evidence from VC-backed startups

Abstract We evaluate the impact of the Protecting Americans from Tax Hikes (PATH) Act of 2015, which allowed some existing venture-capital-backed startups to monetize their research and development (R&D) tax credits against payroll taxes in the United States. We show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act’s enactment. These effects are stronger among startups that are financially constrained. Marginally eligible startups subsequently recruit workers with more education and experience and file more patents with new inventors. Our findings suggest payroll tax credits are effective in scaling startups and stimulating R&D activities through skilled labor recruitment.

Proximity relations and the fate of VC-backed startups: Evidence from a global 33-year-long dataset

Proximity relations and the fate of VC-backed startups: Evidence from a global 33-year-long dataset

The Impact of Initial Intellectual Property Decisions of Start-Ups on Innovation Performance

Abstract We analyze the initial intellectual property (IP) decisions of 336 start-ups in IP-intensive industries in China, distinguishing among patents, trademarks, and IP portfolios. Our empirical results show that the initial IP decisions of start-ups have an impact on their innovation performance. Compared with start-ups that choose trademarks or patents, start-ups that choose IP portfolios have higher financial and non-financial innovation performance. Furthermore, venture capital positively moderates the relationship between initial IP decisions and non-financial innovation performance. VC-backed start-ups that choose IP portfolios are more likely than other start-ups to achieve higher non-financial innovation performance. Finally, strategic planning also plays a role in the relationship. Among the start-ups that choose IP portfolios, those with high strategic planning gain higher non-financial innovation performance. This paper contributes to research on initial IP decisions in entrepreneurial contexts by incorporating IP portfolios to initial IP decisions and uncovering the role of initial IP decisions in innovation performance.

Move-in Ready or Fixer-Upper? VC Specialization and Start-up Innovation

Extant scholarship typically assumes that VC firms prefer to pick winners. I offer an alternative perspective: that specialist VC firms can select less attractive start-ups—with innovative potential but in need of help—and then contribute to the start-ups’ innovative processes so they can achieve their potential. The analogy is buying a fixer-upper house, which, with the right help, can be brought to the level of one that is move-in ready. I argue that specialist (versus generalist) VC firms in the syndicate have superior commercialization knowledge and specialized resource networks, and they can choose to follow a move-in-ready strategy (select winners) or a fixer-upper strategy (build winners). This choice is contingent on the research environment and how unique the help from the specialist VC firm is: in well-developed research environments, a specialist adds less value and may follow a move-in-ready strategy; in less-developed research environments, a specialist adds more value and may follow a fixer-upper strategy. I leverage an ideal empirical context, global biotechnology VC-backed start-ups, over the period 1996–2006, when the biotech industry was established in the United States and developing in 25 other countries, and highlight qualitative insights from 20 interviews with investors in seven countries.Funding: Funding from the Mack Institute for Innovation Management at the Wharton School and from the CIBER at the University of South Carolina is greatly appreciated.Supplemental Material: The online appendix is available at https://doi.org/10.1287/stsc.2022.0176 .

A Study of Private Equity Rounds of Entrepreneurial Finance in EU: Are Buyout Funds Uninvited Guests for Startup Ecosystems?

This paper studies the difference between startup investments by private equity funds (buyout funds; PE) and venture capital funds (VC). PEs, which have traditionally invested in mature companies, have been increasingly investing in later-stage startups in recent years. Based on Crunchbase’s data on EU startup investments from 2011 to the first half of 2021, we find that: (1) later-stage VC-backed startups and PE-backed startups differ in terms of the industry domain, (2) PE-backed startups tend to have higher revenue when they receive investments, and (3) VC-backed startups are more likely to exit via Initial Public Offering (IPO) and slightly less likely to exit via Mergers and Acquisitions (M&A) than PE-backed startups. These results connect previous studies on VC and PE and deepen our understanding of later-stage startup investment. It also suggests that PE invests differently than VCs and provides new added value to the startup ecosystem. In addition, it adds insights into corporate behavior in new business domain expansion.

Synergizing ventures

Venture capital (VC) and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and initial patent quality than non-VC-backed ones. VC-backing increases a startup’s likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.

Conflicting Fiduciary Duties and Fire Sales of VC-backed Start-ups

Conflicting Fiduciary Duties and Fire Sales of VC-backed Start-ups

Determinants of the exit value in European venture capital-backed technology startups

Purpose This study aims to analyze the impact of different exit alternatives, investor presence and founders’ human capital on the exit value of European venture capital (VC)-backed high technology startups. Design/methodology/approach The empirical analysis is based on a sample of 107 European firms that obtained an exit through Merger&Acquisition (M&A) or an initial public offering (IPO) between 2010 and 2017, backed by VC investors. Findings This study provides empirical evidence on how different exit alternatives, investor heterogeneity and founders’ human capital may affect the exit value of European VC-backed startups. Exiting through an IPO and retaining a larger equity stake are positively correlated with the exit value. The presence of business angels and non-governmental VC firms is associated with larger valuations. Founders’ previous education was positively correlated with the exit value. Originality/value Exit strategies in technology startups are essential to capitalize investors’ efforts and reinvest cash into new ventures, supporting the development of entrepreneurial ecosystems and countries’ competitiveness. The results of this study provide interesting hints for policymakers and contribute to an in-depth understanding of the drivers of exit valuation for startups.

The role of high-skilled foreign labor in startup performance: Evidence from two natural experiments

We examine the role of high-skilled foreign labor in VC-backed startups through two natural experiments. First, we show that winning more H-1B visas in random lotteries enhances VC-backed startups’ financial performance, likelihood of going public, and quantity and quality of innovation. Second, we show that the H-1B quota reduction in 2004 caused permanent damage to the performance of startups that previously had used H-1B workers. The findings imply that high-skilled foreign workers possess skills or talents that are difficult to replace and that barriers to securing H-1B visas lower startups’ innovation and financial performance.

Low-code entrepreneurship: Shopify and the alternative path to growth

The past decade witnessed a surge in the availability of low-code tools, where software-based solutions can be developed with limited or no need for writing code. One of the most salient examples is Shopify, which enables a layperson to become a fully-functioning online retailer without ever resorting to writing code. We ask: how do low-code tools affect growth trajectory and entrepreneurial success? How do they change the resources required to scale-up and grow? We explore these questions in the context of the e-commerce sector during the 2010s. Several databases were integrated to construct a sample covering about 400 VC-backed startups; including a detailed profile of their financial, human and software tools. The analyses indicate that Shopify-based startups start life with fewer financial and human resources compared to their e-commerce peers. Yet, despite the leaner beginning, they achieve a similar level of successful exits. The value created per employee, and cash-on-cash return for investors, place Shopify-based startups on par with their peers.

The Labor Effects of R&D Tax Incentives: Evidence from VC-Backed Startups

The Labor Effects of R&D Tax Incentives: Evidence from VC-Backed Startups

Tech Bubble 2.0: How Price Driven Narratives and Return Chasing Behavior Have Created Unsustainably High Valuations for Late Stage Startups in Financial Markets

A narrative that the largest companies in public markets (aka the Big Five - Facebook, Amazon, Apple, Microsoft and Google) were at one point all VC-backed unicorn startups and achieved their success by blitzscaling has propagated a belief that money-losing startups pursuing growth at any cost can offer investors a chance to replicate the Big Five’s outsized returns. In recent years this narrative has led to an explosion in unicorn startups, alongside increasing capital inflows entering into private late-stage startups as a whole. New sources of capital flooding into private late-stage startup fundraising deals comes not just from VC funds but from “non-traditional” VCs, a group that includes mutual funds, hedge funds, sovereign wealth funds and corporations. Historically non-traditional VC investors focused more on stock market investing, but in recent years this group has increasingly participated directly in private market fundraising rounds of late stage startups as a strategy to boost reported returns. In doing so these investors have adopted the VC mindset for investment analysis, prioritizing near-term sales growth and potential for market dominance over profitability. This influx of capital has created an attractive environment for late stage startup fundraising, which has been a contributing factor to elevated valuation levels observed in the space by virtue of the common (but misleading) convention of substituting post-money value for fair value used by private market investors. This upward skew in valuations is a source of bias in the top line returns reported across this asset class, which further reinforces capital inflows to the space. The consequence of the collective dynamics described above has been a positive feedback loop in valuations for late-stage VC-backed startups in private financial markets. In the last few years, VC-backed IPOs have been growing in frequency and size as public market investors are succumbing to price-driven narratives that rely heavily on VC-style investment analysis and less on traditional valuation methods based on normalized earnings and cash flows. This has created the situation where equity valuations for late-stage VC-backed startups have been bid up by speculation and have decoupled from their underlying business value.

The Impact of Social Media on Venture Capital Financing: Evidence from Twitter Interactions

We examine how information acquisition through social media affects venture capital (VC) investments into VC-backed startups. We collect a unique data set from Twitter API to measure the impact of portfolio companies owned social media (OSM) and earned social media (ESM) on the structure of VC investments. We find evidence consistent with the hypothesis that startup firms’ social media engagement affects the staging of VC financing, the VC syndicate structure, and the probability of a successful exit. If a portfolio company’s social media accounts are more active and the company has a higher engagement volume with its followers, VC firms reduce the extent of stage financing and are less likely to syndicate with each other in financing such a portfolio company. In particular, our results demonstrate that entrepreneurial firms with higher OSM and ESM engagement volume have fewer VC financing rounds, a smaller number of VCs in their VC syndicates, a lower probability of VC syndication, a higher probability of an IPO exit and a higher amount total funding across all rounds. Our findings are robust to a variety of alternative model specifications, subsamples, controlling for endogeneity in VC staging and syndication, selection biases and machine learning approaches.

Risk Capital and Emerging Technologies: Innovation and Investment Patterns Based on Artificial Intelligence Patent Data Analysis

The promise of artificial intelligence (AI) to drive economic growth and improve quality of life has ushered in a new AI arms race. Investments of risk capital fuel this emerging technology. We examine the role that venture capital (VC) and corporate investments of risk capital play in the emergence of AI-related technologies. Drawing upon a dataset of 29,954 U.S. patents from 1970 to 2018, including 1484 U.S. patents granted to 224 VC-backed start-ups, we identify AI-related innovation and investment characteristics. Furthermore, we develop a new measure of knowledge coupling at the firm-level and use this to explore how knowledge coupling influences VC risk capital decisions in emerging AI technologies. Our findings show that knowledge coupling is a better predictor of VC investment in emerging technologies than the breadth of a patent’s technological domains. Furthermore, our results show that there are differences in knowledge coupling between private start-ups and public corporations. These findings enhance our understanding of what types of AI innovations are more likely to be selected by VCs and have important implications for our understanding of how risk capital induces the emergence of new technologies.

The Role of High-Skilled Foreign Labor in Startup Performance: Evidence from Two Natural Experiments

We examine the role of high-skilled foreign labor in VC-backed startups through two natural experiments. First, we show that winning more H-1B visas in random lotteries enhances VC-backed startups' financial performance, likelihood of going public, and quantity and quality of innovation. Second, we show that the H-1B quota reduction in 2004 caused permanent damage to the performance of startups that previously had used H-1B workers. The findings imply that high-skilled foreign workers possess skills or talents that are difficult to replace and that barriers to securing H-1B visas lower startups’ innovation and financial performance.

Extending the role of headquarters beyond the firm boundary: entrepreneurial alliance innovation

Prior research on corporate headquarters (CHQ) characteristics identifies the impact of CHQ location and composition on the innovation outcomes of internal subsidiaries. However, given that external strategic alliances with high-tech entrepreneurial firms represent a key source of innovation for the corporation, corporations must also consider how their choices of CHQ location and composition affect the innovation outcomes of these partners. In a study of 36 incumbent pharmaceutical corporations in 377 strategic alliances with 143 VC-backed biotechnology startups, we leverage detailed hand-collected data on CHQ locations and functions to estimate the effect of the CHQ on the innovation performance of the corporations’ entrepreneurial alliance partners. We find that a 1000-km decrease in CHQ–partner distance leads to an increase of 28 forward citations for the alliance partner, i.e., a 1% decrease in the distance is associated with a 1.7% increase in innovation performance. We find that the co-located presence of the corporation’s R&D function at the CHQ attenuates the benefit of CHQ–partner proximity, particularly for alliances structured for horizontal collaboration at the same part of the value chain. This study contributes to the literatures on both CHQ design and technology alliances.

Regional Recipes: A Configurational Analysis of the Regional Entrepreneurial Ecosystem for U.S. Venture Capital-Backed Startups

We examine the relationship between the regional entrepreneurial ecosystem (REE) and the performance of U.S. venture capital (VC)-backed startups. We conceptualize the REE as a complex system and pair a variance decomposition methodology with a fuzzy-set qualitative comparative analysis (fsQCA) to study the configurations (combinations of regional factors) associated with high levels of performance of nascent early-stage startups and mature late-stage ventures. Our key finding is of an inverse relationship between startup maturity and the combinatorial complexity of regional factors that underlie the REE. Our analyses highlight the conditions under which VC-backed startups benefit most from the resources in the REE, extend prior research on location-based competitive advantages, and demonstrate how regional resource dependencies dynamically shift as a function of the startups’ life cycle.

Technological Disruptiveness and the Evolution of IPOs and Sell-Outs

We show that the recent decline in IPOs on U.S. markets is related to changes in the technological disruptiveness of startups, which we measure using textual analysis of patents from 1930 to 2010. We focus on VC-backed startups and show that those with ex-ante disruptive technologies are more likely to exit via IPO and less likely to exit via sell-out. This is consistent with IPOs being favored by firms with the potential to carve out independent market positions with strong defenses against rivals. We document an economy-wide trend of declining technological disruptiveness since World War II that accelerated since the late 1990s. This trend predicts fewer IPOs and more sell-outs, and we find that roughly 20% of the recent dearth of IPOs, and 49% of the surge in sell-outs, can be attributed to changes in firms' technological characteristics.

The geography of technology-intensive start-ups and venture capital: European evidence

This paper aims at providing novel evidence about the geographical concentration of venture capital (VC) activity in seven European countries. Drawing upon a unique dataset, VICO 2.0, we describe the geographical distribution of VC investments and VC-backed technology-intensive start-ups and analyse the regional and country-level factors associated to the regional concentration in VC activity. Results from econometric estimates suggest that regional VC activity is positively associated to the level of regional knowledge intensity, the level of regional human capital, the local supply of VC investors and a more favourable country’s legal and institutional environment.