Venture Capital Reputation Research Articles

Venture capital and stock price informativeness: Evidence from China

AbstractThis study shows that, unlike the positive role played by other institutional investors documented in the literature, venture capital (VC) in pursuit of short‐term gains through exit strategies reduces the stock price informativeness of portfolio companies, especially when VC is associated with a higher level of the ability (longer‐term VC directors, large VC syndicate), incentive (private VC sponsors), and willingness (less reputable VCs) to manipulate information. Furthermore, internal and external monitoring helps mitigate the negative impact of VC on stock price informativeness. Finally, earnings management and reduced information disclosure mediate the relationship between VC involvement and stock price informativeness.

Venture capital and methods of payment in mergers and acquisitions

AbstractWe find evidence that venture capital (VC)‐backed targets receive more stock as the method of payment in mergers and acquisitions than non‐VC‐backed targets do, even after controlling for self‐selection bias, differences of characteristics between transactions of VC‐backed and non‐VC‐backed targets and VC information bridge‐building. VC‐backed targets prefer stock of acquirers that are small, young, risky or invest intensively. In addition, we document that the ratio of stock is larger when the targets are financed by reputable VCs, a syndicate of VCs or VCs with low fund maturity. Overall, our findings suggest that VCs strategically hold shares of the acquirers that meet their investment preferences.

Mitigating information asymmetry to acquire venture capital financing for digital startups in China: The role of weak and strong signals

AbstractThis paper addresses how weak and strong signals affect venture capital funding acquired by digital startups at their early stage in various industries of China. We also articulate the interaction mechanism of these strong and weak signals by demonstrating their complementary or substitutive effects in alleviating information asymmetry on startup quality, which can help digital startups secure venture capital financing. Drawing on signalling theory and institutional legitimacy theory, we introduce application (app) downloads as a novel strong signal that can reduce market legitimacy concerns, and previous‐round venture capitalist reputation as a traditional strong signal that mitigates regulatory legitimacy concerns. We treat founders' startup and IT experience as weak signals, as they provide rhetorical and indirect information indicating a startup's potential to establish regulatory and market legitimacy. The study empirically investigates our hypotheses using data of 163 digital startups in various industries of China. Results confirm the positive relationships between strong signals and venture capital funding secured by a digital startup. Furthermore, signals of similar strength are found to complement each other's effects in certain situations, while strong signals can reduce the effects of weak signals on a digital startup's financing performance under specific conditions that create these mixed effects. Implications for digital startup research and practice as well as limitations and suggestions for future research are discussed.

Reputation as Capital—How Decentralized Autonomous Organizations Address Shortcomings in the Venture Capital Market

Venture capital (VC) models can be optimized with emerging decentralized technology. There are many disadvantages that come with traditional VC fundraising including illiquidity and ownership struggles, as well as timing. This paper will discuss alternative funding mechanisms that may be available and advantageous to emerging businesses. After discussing the shortcomings of the existing VC market and the rise of alternative early round funding mechanisms, the paper highlights the evolution of VC businesses that are operated by a Decentralized Autonomous Organization (DAO). More specifically, models discussed in this article contribute to the much-needed experimentation with venture capital reputation models.

Does Venture Capital Reputation Contribute to Pre-IPO Performance of Entrepreneurial Firms in the Chinese Context?

This study investigates venture capital (VC) reputation impact on the pre-IPO performance of the entrepreneurial firms backed by three kinds of VCs. This study employs backward stepwise regression models following prior theoretical frameworks to examine the research question. Based on a database of the top 50 VC firms ranked during 2016 to 2020 and their portfolio firms. This study shows some contingent contribution to pre-IPO firm performance. Firstly, the reputation of the Chinese government-owned VCs is negatively associated with their portfolio firm performance. Still, there is a positive relationship between foreign and local private VCs. Secondly, entrepreneurial firm performance is significantly associated with industry policy and entrepreneur’s performance than VC reputation. This study has practical implications for entrepreneurs and limited partners regarding their corporation relationships with the Chinese VCs. JEL codes: G24, G34

Venture capital and corporate social responsibility

We examine the impact of venture capital (VC) on corporate social responsibility (CSR) performance in China. Exploiting the timing of VC exit, we find that the CSR performance of VC-backed companies improves after the exit of VC. Using the age of VC funds as an instrument for VC exit, we find that the effect is likely to be causal. Further analyses suggest that the effect is largely driven by inexperienced, badly performing, and less reputable VCs.

VC fund preferences and exits of individual investors

The venture capital (VC) preferences and exits of individual investors have been a puzzle in emerging markets. Using a large dataset of limited partners (LPs) and VC funds in China, we find that compared with corporate and institutional LPs, individual LPs in the VC market prefer funds managed by reputable VCs, fund managers with prior experience as venture capitalists, non-government VCs, and funds with less concentrated ownership. Moreover, we find that funds with individual LPs have a greater number of exits via IPO and trade sales, and funds with individual LPs managed by reputable VCs have better exit returns. Our results further suggest that funds with individual LPs have shorter time to exit. These findings hold after controlling for different fixed effects and endogeneity issues. Collectively, our findings suggest that individual LPs seek fund characteristics known to help mitigate agency costs. Our paper sheds lights on the investment preferences of individual LPs and the impact of LP structure on VC fund exits.

Venture Capital and Corporate Social Responsibility

We examine the impact on venture capital (VC) involvement and monitoring on their portfolio companies' corporate social responsibility (CSR) performance. Exploiting the timing of VC exit, we find that CSR performance of VC-backed companies improves after the exit of VC. Using the age of VC funds as an instrument for VC exit, we find that the effect is likely to be causal. We also find that portfolio firms' CSR performance declines after the introduction of direct high speed rail services between VC firms and their portfolio companies. Further analyses suggest that the effect is largely driven by inexperienced, bad performing, and less reputable VCs.

Do M&A exits have the same effect on venture capital reputation than IPO exits?

This paper examines whether merger and acquisition (M&A) exits have the same effect on venture capital (VC) reputation than initial public offering (IPO) exits? Using a large sample of U.S. IPOs and M&As for the period 1996–2015, we find that M&A exit strategy has the same importance as IPO exit strategy in explaining the incentives of young venture capital firms to grandstand. There is, however, no evidence that young VC firms exit from their portfolio companies closer to the next follow-on fund than older VCs. In addition, our results show that to build their reputation, young VC firms are willing to accept a lower premium in the case of M&A exits and to bear the cost of higher underpricing in the case of IPO exits. We also find that the presence of reputed VC affects significantly the probability of an IPO exit over an acquisition exit.

Venture capital reputation: a blessing or a curse for entrepreneurial firm innovation\u2014a contingent effect of industrial distance

This study investigates whether venture capital reputation is a blessing or a curse for entrepreneurial firm innovation by using data from 1553 observations of venture capital investments on entrepreneurial firms in China’s New Over-the-Counter (OTC) Market. Advantages that venture capital brings to entrepreneurial firms have been widely acknowledged in extant research. However, our research emphasizes the potential resource outflows rather than inflows when firms are embedded in a shared reputable venture capital, and finds that the curse effect of venture capital reputation on entrepreneurial firms is manifested. Furthermore, we develop the concept of venture capital “intra-industrial reputation” and “extra-industrial reputation” to give a contingent answer to the “blessing or curse” question. The conclusions are drawn indicating that the curse effect is contingent on industrial distance. Venture capital intra-industrial reputation is positively linked to entrepreneurial firm innovation, whereas extra-industrial reputation exerts a strong negative impact, which is responsible for the curse effect.

Venture Capital and Method of Payment in Mergers and Acquisitions

We show that Venture Capital (VC)-backed targets receive a significantly higher fraction of stock and a greater likelihood of all-stock offers than non-VC-backed targets, even after controlling for self-selection bias, differences between VC-backed and non-VC-backed targets, and VC information bridge-building. Additionally, VC-backed targets receive a larger fraction of stock when the acquirer is young and risky, and has high growth rate, large investment and potential managerial improvement. Independent VCs, reputable VCs and VC syndicates who are capable of monitoring and advising accept a larger proportion of stock. We also document that the acquirer’s short-term and long-term returns are more positive when VC-backed targets choose stock payment. Altogether, our results indicate that VCs strategically hold shares of acquirers who meet their investment preferences and contribute to their performance.

The diminishing effect of VC reputation: Is it hypercompetition?

Venture Capital (VC) influence on Technology Entrepreneurship (TE) and economic development has prompted policy makers to devote significant resources for attracting VCs to their area, especially VCs with a higher reputation. The VC literature has traditionally supported the importance of VC firm reputation to success of entrepreneurial firms and entrepreneurial activity in a region. The VC industry structure, where the VC firm reputation strongly determines their power and investment returns, seems to have remained isolated from the disruptive influences of hypercompetition affecting other industries. But, this assumption remains untested. Our goal in this study is to assess if VC industry is changing and becoming more hypercompetitive. We empirically assess the influence of VC reputation by studying its impact on the success of portfolio companies over a 24-year period from 1990 to 2013. More specifically, we assess whether ventures backed by high reputation VCs have better post Initial Public Offering (IPO) performances than ventures backed by low reputation VCs. Our findings indicate that while VC reputation was strongly associated with portfolio company success in the past, its impact has diminished significantly in recently.

From IPO to M&A: Further Evidence

This study investigates the determinants of mergers and acquisitions (M&A) for firms in the five years following their initial public offerings (IPOs). Specifically, the authors focus on the role of venture capital (VC) and the effect of asymmetric information on the probability of post-IPO M&A. The results indicate that VC reputation positively influences the likelihood that an IPO firm will engage in acquisition. They also find that a high extent of information asymmetry faced by both the acquirer and the target affects the choice of payment in a post-IPO M&A. Furthermore, they find that IPO firms with higher underpricing and proceeds, larger insider ownership dilution, and backed with reputable venture capitalists are more likely to be frequent acquirers after the IPO. Overall, the authors’ new findings confirm that an IPO represents an opportunity for new issuers to become single and even frequent acquirers.

Venture capital reputation and portfolio firm performance in an emerging economy: The moderating effect of institutions

This paper addresses the effects of venture capitalist (VC) reputation on the performance of portfolio firms, and how this works in different institutional settings. Drawing on a dataset of 519 portfolio firms from China, we found that VC reputation does significantly increase the market value of portfolio firms in both the IPO year and the subsequent years. In addition, institutions moderate the relationship between VC reputation and portfolio firm performance such that the effect of VC reputation is positive and significant given extensive rule-based institutions, but insignificant given more relationship-based institutions. Our results provide empirical support for the impact of institutional factors such as market transparency and institutional efficiency on how venture capital firms can add value to invested portfolio firms.

The Influence of Top Management Team Composition of Venture Capital Reputation for Their Investment Strategies of Industry Diversification

The Influence of Top Management Team Composition of Venture Capital Reputation for Their Investment Strategies of Industry Diversification

Does startup experience matter? Venture capital selection criteria among Israeli entrepreneurs

In this study we are concerned with understanding Israeli entrepreneurs’ selection criteria in choosing a venture capital (VC) firm. Our primary aim was to investigate how startup experience impacts entrepreneurs’ trade-offs between resource-related criteria and criteria related to the conditions of the deal. Hypotheses are drawn from agency theory, the resource dependence perspective and extant VC research. Data is gleaned from interviews with 144 Israeli entrepreneurs that are either in the process of acquiring VC or have recent experience of raising it. Hypotheses are tested with ordinal logit models. Results demonstrate that there is a negative relationship between startup experience and the importance entrepreneurs attach to valuation, and that the importance attached to a VC firm’s network and reputation moderates this relationship. In addition, the importance attached to a VC firm’s network moderates the relationship between startup experience and the importance assigned to contractual terms. Furthermore, results indicate that while inexperienced entrepreneurs attach more importance to valuation than experienced ones, they tend to emphasize it less when they seek to gain access to a VC firm’s network of contacts. Entrepreneurs are shown to be more concerned about valuation when they approach less reputable VC firms, particularly if the entrepreneur has substantial startup experience.

Entrepreneurial Litigation and Venture Capital Finance

This paper empirically examines the impact of entrepreneurial firm plaintiff litigation on the ability of entrepreneurial firms to obtain venture capital (VC), and the subsequent effect on VC exit outcomes. This empirical context is important, as both the costs of litigation and potential benefits are arguably more pronounced for start-ups relative to established firms. We consider cases of litigation being initiated both before and during VC financing. The data indicate (1) plaintiff firms are more likely to obtain financing by less reputable VCs, (2) VCs provide more oversight of plaintiff firms relative to non-plaintiff firms in their portfolio, (3) plaintiff firms are more likely to exit by an IPO (versus acquisition), and less likely to be defunct at the end of the investment period; these exit outcomes are more pronounced for successful plaintiff firms, and (4) underpricing is reduced when PCs win or lose cases but is increases when cases are settled. For all results, implications are less severe for litigants who begin their suit after VC suggesting these entrepreneurial litigants have the backing of the VC.

Venture Capitalist Reputation And The Effect On Venture Lending Contracts

This study is based on a proprietary dataset entailing 119 venture lending contracts issued by a European venture lending fund between 2002 and 2009 in Europe, United States and Israel. We conduct ...

Venture Capital Reputation: A Note

Venture Capital reputation is the perception that a Venture Capital (VC) firm will create value for investors. This note briefly surveys the firm reputation literature, and lists the top 10 most reputed VC firms.

Venture Capital Performance in China

This study investigates the determinants of venture capital (VC) performance in China. We focus on the impact of VC reputation, political connections, and managing partner/founder’s experience on the performance of domestic and foreign VC investments. After controlling for VC age, portfolio firm age, syndicate size, VC industry competition, and a number of other factors, we find little correlation between VC reputation and investment performance in the Chinese market. In contrast, we find that the institutional characteristics such as political connections of VC firms and managing partner/founder’s prior experience as managers and investment bankers are crucial to domestic VC success, but these have little impact on foreign VC performance. In particular, if a domestic VC firm is politically connected, or a managing partner/founder has more management experience or has previously worked as an investment banker, a portfolio firm is more likely to have an IPO exit through the Chinese mainland stock markets, and these VCs are also likely to speed up a portfolio firm’s exit through IPOs in China.