How Do Corporate Venture Capitalists

Create Value for Entrepreneurial Firms?

by

Thomas J. Chemmanur*
and
Elena Loutskina**

Current Version: June, 2008

* Associate Professor of Finance, Carroll School of Management, Boston College, 440 Fulton Hall, Chestnut Hill, MA 02467,
Tel: (617)552-3980, fax: (617) 552-0431, e-mail: chemmanu@bc.edu.
** Assistant Professor of Finance, Darden Graduate School of Business Administration, University of Virginia, Charlottesville
VA 22903, Tel: (434) 243-4031, e-mail: eloutskina@virginia.edu.

How Do Corporate Venture Capitalists

Create Value for Entrepreneurial Firms?

ABSTRACT

We analyze how corporate venture capitalists (CVCs) create value for entrepreneurial firms backed
by them and how value creation by CVCs differs from that of independent venture capitalists (IVCs).
Making use of a large data set consisting of a sample of CVC-backed and IVC-backed firms (starting
from their first round of investment in an entrepreneurial firm and going well into the post-IPO market),
we explore three related research questions: First, do CVCs exploit their knowledge and industry
expertise when choosing portfolio firms, and invest in significantly different kinds of firms compared to
independent venture capitalists (IVCs)? Second, do they succeed in creating greater product market value
subsequent to investment compared to IVCs? Finally, do they allow portfolio firms to access the equity
markets more efficiently? Our empirical findings indicate that there are two ways in which CVCs
uniquely create value for entrepreneurial firms. First, CVC create value by investing significant amounts
in younger and riskier firms involving pioneering technologies: since many such firms would not have
received private equity financing from IVCs, these firms may not have been able to grow and mature
without CVC funding. Second, CVCs seem to play an important role in signaling the true value of firms
backed by them to three different constituencies: first, to IVCs, prompting them to co-invest in these firms
pre-IPO; second, to various financial market players such as underwriters, institutional investors, and
analysts, allowing them to access the equity market at an earlier stage in their life-cycle compared to firms
backed by IVCs alone; and third, directly to IPO market investors, allowing CVC-backed firms to obtain
higher IPO market valuations compared to the valuation of firms backed by IVCs alone.

How Do Corporate Venture Capitalists

Create Value for Entrepreneurial Firms?
1. Introduction
US corporations started to establish internal venture capital funds (often referred to as corporate
venture capital) back in the 1960s. Over the years, corporate venture capital investments accounted for
around 7% of venture capital industry reaching 10% in recent years. In the year 2000, corporations
invested in almost 1900 entrepreneurial companies with a total dollar investment of around $16 billion.
Corporate venture capitalists (CVCs) present an interesting case study, since, even though they share a
number of features with independent venture capital firms (IVCs), they are significantly different from
IVCs in many ways, some of which are as follows. First, CVCs are structured as subsidiaries of
corporations and can only have one (corporate) investor as opposed to IVCs, who are traditionally
structured as limited partnerships where general partners invest in entrepreneurial firms on behalf of
limited partners who provide the funds for investment. Second, the performance-based compensation
structure enjoyed by IVC managers is normally not found in CVC funds, where managers are mostly
compensated by fixed salary and corporate bonuses, so that corporate venture capitalists may be less
concerned than IVCs with the immediate financial returns from their entrepreneurial firms. Third, the
presence of a corporate parent may provide CVCs with a unique knowledge of the industry and the
technology utilized by the entrepreneurial firm.1
The venture capital literature has argued that venture capitalists, in general, create value for the
entrepreneurial firms they invest in several ways. For example, Hellman and Puri (2000, 2002)) has
documented that IVCs are able to create product market value for entrepreneurial firms, by
professionalizing firm management and helping them develop contracts with suppliers and customers.2
At the same time, a number of papers in the venture capital and IPO literature have argued that the pricing

See Gompers and Lerner (2000) for a detailed discussion of the differences in governance and compensation structures between
CVCs and IVCs.
2
The assumption that venture capitalists can help entrepreneurial firms perform better in the product market has also become
standard in the theoretical literature on venture capital: see, e.g., Repullo and Suarez (2001) or Chemmanur and Chen (2003)).

of IPO shares in venture backed firms is significantly different from that in non-venture backed firms,
either in terms of the extent of underpricing (see, e.g., Megginson and Weiss (1991); Barry, Muscarella,
Peavy and Vetsuypens (1990); or Lee and Wahal (2000)) or in terms of share valuation with respect to
intrinsic value (Chemmanur and Loutskina (2003)). Further, venture backing also seems to affect the age
at which firms are able to go public (see, e.g., Loughran and Ritter (2004)). In other words, venture
backing seems to affect the ease of entrepreneurial firms to access the capital markets, and terms under
which they are able to access these markets. A natural question that arises here is how the significant
governance and other differences between the two kinds of venture capitalists affect result in differences
in value creation by CVCs and IVCs for the entrepreneurial firms backed by them. The objective of this
paper is to answer this question by empirically analyzing differences in value creation by corporate
venture and independent venture capitalists, and thereby to develop a better understanding of the unique
ways in which CVCs are able to create value for entrepreneurial firms backed by them.
We hypothesize that CVCs may differ from IVCs in creating value for portfolio firms in three
important ways. First, CVCs may invest in different kinds of firms compared to IVCs, and may provide
funding to firms at different stages in their life cycle. The terms under which they provide funding may
differ across CVCs and IVCs. These differences may arise from the differences in institutional structure
and the objectives of these two kinds of intermediaries: while IVCs are primarily concerned with the
financial returns from their portfolio firms, CVCs may also be concerned with other benefits to the
corporate parent that may arise from the investment, such as exposure to a pioneering technology and
early establishment of alliances in the product market. Further, the industry and technology expertise of
CVCs may allow them to screen firms better, which may allow them to invest larger amounts in riskier
and more R&D intensive firms (with longer time to achieving profitability) compared to IVC
investments. Finally, there may be differences in bargaining power between CVCs and IVCs, so that the
terms of financing of entrepreneurial firms may differ across these two intermediaries.
Second, CVCs and IVCs may differ in their ability to create product market value for entrepreneurial
firms subsequent to investment. The empirical literature (e.g., Hellman and Puri (2000, 2002)) has
2

documented that IVCs are able to create value for entrepreneurial firms, for example, by
professionalizing firms management. On the one hand, specialization by IVCs in making investments in
certain industries may help them develop contracts superior to that of CVCs in the product market (e.g.,
with suppliers and intermediaries) which may be beneficial to entrepreneurial firms backed by them. On
the other hand, the effect of the superior industry expertise of CVC -parent may outweigh the effect of
such industry contacts, allowing CVCs to create greater product market value for entrepreneurial firms
backed by them. Such differences in value creation may potentially be reflected in differences in post-IPO
operating performance for CVC and IVC backed firms.
Third, CVCs and IVCs may have different abilities to help portfolio firms access the capital markets,
and the terms under which they access these markets. One the one hand, IVCs, being more frequent
players in the IPO market, can be expected to have stronger relationships with top-tier investment banks,
institutional investors, and financial analysts which may allow them to better communicate firm value to
the capital market. On the other hand, backing by a corporate parent may convey a credible signal to the
financial market about the future prospects of the entrepreneurial firm. Such differences between CVCs
and IVCs may translate into different probabilities of a successful exit for CVC and IVC backed firms,
and to different proportions of these kinds of exits. These differences may also result in systematic
differences in the IPO market valuation between CVC-backed and IVC-backed firms. 3
In this paper, we make use of data regarding a large sample of CVC and IVC backed firms to
identify some of the aspects of value creation for entrepreneurial firms by corporate venture capitalists
discussed above. Our dataset consists of round by round financing data starting with the very first
investment made by venture capitalists in a private firm, extending through the firms IPO stage, and
ending with post-IPO operating performance and financial market data for five years subsequent to the
IPO. Our data set contains not only the characteristics of entrepreneurial firms, but also various aspects of
the CVCs and IVCs investing in those firms.

Of course, these differences in exit probabilities and market valuations may also reflect differences in the kinds of firms
invested in by CVCs and IVCs, and differences in the product market value created by these two kinds of intermediaries.

Our empirical analysis consists of six parts. First, we study various characteristics of CVC backed
firms and compare them with those of IVC backed firms. Second, we study the probability of a successful
exit (IPO or acquisition) for CVC backed firms, and compare this to that of IVC backed firms. Third, we
study the five year post-IPO operating performance of CVC backed firms, and compare this to that of
IVC backed firms. Fourth, we compare the quality and the extent of participation by financial market
players such as underwriters, institutional investors, and coverage by analysts in the IPOs of CVC and
IVC backed firms. Fifth, we compare equity valuation in the IPOs of CVC backed and IVC backed firms.
Finally, we compare the long-term post-IPO stock returns of CVC backed and IVC backed firms.
Our paper provides a number of new results on the sources of value creation by CVCs. Our results
can be summarized as follows. First, we document (for the first time in the literature) that the investment
patterns of CVC are significantly different from that of IVCs. CVCs tend to invest into younger and
riskier firms and in earlier rounds compared to IVCs. These firms tend to be in less mature industries
which require significantly larger R&D and capital expenditures, and which are more competitive (have
no dominant firm in product market). Further, CVCs are more likely to select portfolio companies in
industries closely related to that of their corporate parent. Finally, CVCs invest significantly large
amounts of money per round than IVCs (even compared to IVC investments in the same firm) and at
higher valuation than IVCs (i.e., the fraction of stock ownership given to CVCs in exchange for each $1
million invested is lower).
Second, we find that the probability of a successful exit (IPO or acquisition) is higher in CVC
backed firms compared to IVC backed firms. Further, the probability of having an IPO rather than
acquisition is greater for a CVC backed firm. However, we find that the time from first venture capital
investment to exit is greater for CVC backed firms, consistent with our earlier findings that CVCs invest
in younger firms, in less mature industries and in earlier rounds (which may take longer time to reach
profitability).
Third, we document (for the first time in the literature) that CVC-backed firms underperform IVCbacked firms in terms of operating performance for the first five years after the IPO. Even after we
4

control for firm industry, size, and year of the issue, CVC backed IPOs underperform IVC backed IPOs
by 23.2% in terms of profit margin and 26.9% in terms of sales margin. Consistent with this, we find that
CVC-backed firms have a greater probability of being delisted (due to liquidation) in the years
immediately after IPO. However, the extent of underperformance of CVC-backed firms declines with the
number of years after IPO: while the average underperformance in the first year post IPO is 23.2 % in
terms of profit margin and 26.9% in terms of sales margin, this underperformance declines to 2.7% and
0.4% respectively in the fifth year post-IPO. Further, the post IPO sales growth of CVC backed firms is
higher than IVC backed firms: this difference in sales growth is highest in the first year post-IPO (35,5%
on average) and becomes smaller with the number of years after IPO (this difference is only 7.7% in the
fifth year post IPO). Finally, we find that CVC backed firms have significantly higher R&D and capital
expenditures than IVC backed firms, consistent with our earlier evidence that CVCs invest in firms in
more R&D and capital intense industries. Overall, our results suggest that CVCs are able to take younger
firms that are further away from profitability public, and that these CVC backed IPO firms have greater
growth options than firms taken public by IVCs.
Fourth, we compare the extent and quality of participation by various market players in the IPO of
CVC and IVC backed firms. In particular, we compare the reputation of the underwriters involved; the
number of institutional investors participating in IPO and institutional investor holding as a fraction of
IPO shares sold; extent of analysts coverage immediately post-IPO; and the reputation of IVCs
participating in CVC and IVC backed IPOs. Contradictory to what one might expect from the fact that
IVCs are more frequent players in the IPO market compared to CVCs, we find that the extent and quality
of participation by various market players is higher for CVC-backed IPOs than for IVC backed IPOs:
thus, underwriter reputation, participation by institutional investors, and analyst coverage are higher for
CVC-backed IPOs compared to IVC-backed IPOs. Even more surprisingly, the reputation of IVCs coinvesting with CVCs in CVC-backed IPO firms is similar (i.e., not lower than) the reputation of IVCs
investing in IPO firms backed by IVCs alone. However, our regression analysis indicates that, even after
controlling for the presence of reputable IVCs co0investing in CVC-backed IPOs, these IPOs are
5

characterized by higher reputation underwriters, greater analyst coverage, and large post-IPO institutional
investor holdings. The fact that despite brining younger firms further away from profitability (on average)
to the IPO market, CVCs are able to attract greater participation by more reputable market players
indicates a signaling role for CVC-backing in IPOs: i.e., backing by CVCs with superior industry
knowledge seems to effectively communicate that IPO firm has good future prospects to various market
players.4
Fifth, we compare IPO and secondary market (at first trading day closing price) valuations of CVC
and IVC backed IPOs. We find that various price to value multiples (where value is computed using
comparable firm multiples or using discounted cash flow models using realized earnings) are higher for
CVC backed IPO firms than for IVC backed IPO firms (regardless of whether they are computed using
the IPO price of the secondary market first day closing price). Our multivariate analysis indicates that the
increased presence of various high quality market players such as high reputation underwriters, greater
institutional holdings, and greater analyst coverage results in higher equity market valuations of IPO
firms. However, the higher IPO and secondary market valuation associated with CVC backed firms
persist even after controlling for the presence of various high quality market players, indicating that in
addition to attracting higher quality market players to the IPOs of firms backed by them, CVC-backing
also has a direct role in signaling firm value to the equity market.
Finally, our comparison of the long-term post-IPO stock returns of CVC and IVC backed firms
indicated that CVC-backed firms outperform IVC-backed firms over the five year period after the IPO.
The fact that CVC-backed IPOs do not underperform IVC-backed IPOs in terms of long-run stock return
indicates that the higher valuation we documented earlier for CVC-backed firms is not the result of a
temporary overvaluation of these firms at the time of IPO: one should expect such a temporary
overvaluation to be corrected over a five year period, yielding long run stock return underperformance for
CVC backed firms relative to IVC backed firms.

See, e.g., Leland and Pyle (1977) for a signaling model where the extent of ownership by firm insiders with private information
conveys the true value of a firm to outside investors in the equity market.

Overall, our empirical findings indicate that there are two ways in which CVCs uniquely create value
for entrepreneurial firms. First, CVC create product market value by investing significant amounts in
younger and riskier firms involving pioneering technologies: since many such firms would not have
received private equity financing from IVCs, these firms may not have been able to grow and mature
without CVC funding. Second, CVCs seem to play an important role in signaling the true value of firms
backed by them to three different constituencies: first, to IVCs, prompting them to co-invest in these firms
pre-IPO; second, to various financial market players such as underwriters, institutional investors, and
analysts, allowing them to access the equity market at an earlier stage in their life-cycle compared to firms
backed by IVCs alone; and third, directly to IPO market investors, allowing CVC-backed firms to obtain
higher market valuation for these IPOs (in combination with the increased participation by various
reputable market players) compared to the valuation of firms backed by IVCs alone. In summary, we find
that CVCs create significant value for entrepreneurial firms and their shareholders in the above two ways.
The rest of the paper is organized as follows. Section 2 discusses the related literature. Section 3
discusses the data and sample selection. Sections 4 though 8 present our empirical tests and results. We
conclude the paper and discuss the results in Section 9.
2. Related Literature
The empirical literature on corporate venture capital is relatively small.5 An important paper in this
literature is Gompers and Lerner (2000), who study how the organizational and compensation structure in
CVC-backed firms affect their performance.6 They find that CVC-backed firms are more likely to go
public compared to IVC backed firms. Further, they find that this result is particularly strong if there is a
strategic fit between a CVC-parent and the entrepreneurial firm backed by it. Coles, Hertzel, and
Santhanakrishnan (2002) also study the impact of complementarities on the likelihood of a successful exit

See Hellman (2002) for a theoretical model of corporate venture investing. His model predicts that CVCs will invest in and
provide product market support for start-up with greater strategic fit with the CVCs corporate parent.
6
See also Gompers (2002), who explores a detailed history of corporate venture investments over the part twenty years. He
documents that corporate venture capital investments tend to have higher success rates (in terms going public) than the
investments on independent venture capital firms.

for CVC-backed firms. He find that CVC backed firms having a strategic fit with the CVC parent are
more likely to receive product market support from the CVC-parent, which, in turn, increases the
likelihood of a successful exit. While our finding that CVC backed firms have a higher probability of a
successful exit compared to IVC backed firms is consistent with that of the above two papers, this paper
focus on the product market fit as the only reason for this higher success probability. In contrast, our
results suggest that the ability to attract greater participation from reputable players may also contribute to
the higher probability of a successful exit of CVC-backed firms.
There has been no literature so far comparing the participation of various market players in IPOs of
CVC and IVC backed firms. There is also been no literature studying the post-IPO operating performance
of CVC backed firms, nor is there any literature on the post-IPO stock returns of the CVC backed firms.
In other words, ours is the first paper to compare the post-IPO operating performance, extent of
participation by reputable financial market players, and post-IPO stock returns of CVC and IVC backed
firms.7 Ours is also the first paper to systematically study the firm, industry, and other characteristics that
prompt CVC to choose a particular firm to invest in.8

3. Data and Sample Selection

3.1

Who Are Corporate Venture Capitalists?

Corporate venture capitalists are stand-along subsidiaries of non-financial corporations who invest in

new ventures on behalf of their corporate parent. To identify these investors we start with the list of
venture capitalists who enjoy investments from corporations provided by SDC Platinum Venture Expert.
Among all venture capital firms, SDC identifies 1846 suspects for being a corporate VC. Using various
sources of information (Factivia, Google, LEXUS/NEXUS, etc.) we then identify (by hand) those with a
unique corporate parent. The original list of 1846 VCs produces: (i) 456 firms that cannot be considered

Similar to our paper, Maula and Murray (2000) and Ivanov (2003) also compare the IPO market valuations of CVC-backed and
IVC-backed firms and find that CVC-backed firms are characterized by higher IPO valuations.
8
However, Gompers (2002) documents, consistent with our results, that a majority of CVC investments go to firms making use
of technologies related to the CVC-parent.

a CVC since they represent financial companies, partnerships, or funds with multiple corporate parents;
(ii) 466 VC firms have foreign or unknown parent.9 This leaves us with 926 distinct corporate venture
capital firms out of which 562 are publicly traded companies. An entrepreneurial firm is considered to be
backed by a CVC if it has at least one CVC investor. Furthermore, to evaluate the degree of participation
in a company by a CVC we compute the share of CVC dollar amount invested in the total amount
obtained by an entrepreneurial firm over all VC investment rounds. Using this measure we separate the
set of CVC backed firms into those with a share of CVC investment above 20% (high-CVC-investment,
HCVC) and those with a share of CVC investment below 15% (low-CVC-investment, LCVC).
Finally, for each corporate venture firm we find the characteristics of the corporate parent such us
industry, size, etc. Specifically we match the sample of CVCs to the Compustat database to identify
publicly traded corporate parents and to the D&B database to identify private corporate parents. This
matching allows us to identify the primary SIC code for the CVC corporate parent.10 We use these SIC
codes to evaluate the industry match between corporate parent and entrepreneurial firms. Specifically, for
each entrepreneurial firm we construct four industry match indices that are equal to the number of CVCs
backing this firm that are in the same industry as measured by 2 digit SIC code, 3 digit SIC code, 4 digit
SIC code, and Fama-French industry classification code, respectively.

3.2

Reputation of Independent Venture Capitalists

In this study we evaluate the value creation of corporate venture capitalists relative to independent

venture capitalists. We obtain the list of IVCs from SDC Platinum VentureExpert database. We obtain
data on 11,556 venture capital firms out of which 10,164 are independent VCs, 926 are CVCs, and 466
are unclassified or foreign investors. For each IVC and a specific date (e.g., financing round date, exit
date, or IPO date) we compute five different reputation measures: (i) the age of the IVC measured as a
number of years since VC firm date of birth; (ii) the amount of funds raised by the VC firm over the 5

We exclude the CVC funds with foreign corporate backing to eliminate a possible sample selection bias.
In addition we use segment data from Compustat to identify segments SIC codes for public corporations (the data is available
from 1992 onwards).
10

years prior to the date of interest (similar to Gompers and Lerner (1998)); (iii) total dollar amount raised
by an IVC since 1965; (iv) number of rounds the IVC firm participated in since 1965; (v) total dollar
amount invested since 1965. We use these measures to control for the presence of IVC investment in an
entrepreneurial firm since CVCs tend to co-invest with independent venture capitalists.

3.3

Round Financing Data

To evaluate the investment patterns of venture capitalists we use data on round-by-round investments

by VCs provided by SDC Platinum VentureExpert. Here we can classify the data into two groups. First,
we obtain information about the set of firms that obtained venture capital financing in the period of 1980
to 2004. We exclude financial firms, firms that obtained round financing prior to 1980, firms with
unclassified venture capital investments (e.g., those with foreign VC investors), and those with missing or
inconsistent data. This gives us 24,549 distinct firms. VenureExpert provides us with the following
information: (i) date of first and last round of financing; (ii) number of financing rounds; (iii) firms
development stage at first investment round; (iv) SIC code; (v) date the firm was established; (vi) date
and type of exit (e.g., IPO, acquisition, or write-off). We further update and cross-reference this
information with other databases. Specifically, we update and fill in the missing values for SIC codes
using Compustat data for already public firms and D&B and CorpTech Explore Databases for private
firms. We find that the SIC codes provided by these databases coincide with ones provided by
VentureExpert in 76% of the cases at 3 digit level and in 82% at 2 digit level. We further update and fill
in the missing observations for the date the firm was established. We use Jay Ritters database for the
subset of firms that went public and D&B and CorpTech Explore Databases for firms remaining private.
Second, VentureExpert provides the information about venture round by round disbursements
obtained by entrepreneurial firms. Between 1980 and 2004 there were 140,915 investment rounds by
individual venture capitalists in portfolio firms. Here we can observe numerous characteristics of the
financing round including: (i) identity of the investing VCs; (ii) round number; (iii) amount invested this
round; (iv) total amount invested this round; and (v) post-round valuation.
10

Table 1 presents the summary statistics for the round-by-round financing. Panel A and Panel B
present characteristics of round investments by CVCs and IVCs respectively in CVC backed firms.
Panel C on the other hand reports these characteristics for IVC financing rounds in firms that are backed
by IVCs alone. We observe that CVCs tend to invest in younger firms at earlier financing rounds
compared to IVCs both in CVC and IVC backed entrepreneurial firms. Second, they invest significantly
larger dollar amounts reaching on average $3.6 million compared to around $2 million invested per round
by IVCs. Finally, CVC backed firms on average tend to be valued higher than IVC backed firms: $124
million for CVC backed firm versus $55 million for IVC backed firm.

3.4

Sample of IPO firms

Significant section of the paper evaluates how CVCs affect an entrepreneurial firms access to the

secondary market. Specifically, we compare the characteristics of CVC and IVC backed IPO firms. To
accomplish this, we obtain the list of IPOs of equity from 1980 to 2004 from the SDC Platinum New
Issue Database. In common with many other studies of IPOs, we eliminate equity offerings of financial
institutions (SIC codes between 6000 and 6999) and regulated utilities, as well as issues with offer price
below $5. The IPO should issue ordinary common shares and should not be a unit offering, closed-end
fund, real estate investment trust (REIT), or an American Depositary Receipt (ADR).11 Moreover, the
issuing firm must be present on the Compustat annual industrial database for the fiscal year prior to the
offering, as well as on the University of Chicago Center for Research in Security Prices (CRSP) database
within three months of the issue date.
We merge this IPO list with the VentureExpert database to construct consistent venture backing and
corporate venture backing flags. We find that 287 of IPO companies have venture investments as reported
by VentureExpert database but are classified as non-VC backed in SDC Platinum. We consider these
firms to be VC backed. Similarly 365 are classified as VC backed in SDC Platinum but are not recorded

11

We do not rely on SDC classifications alone for identifying IPOs of ordinary shares. We independently verify the share type
using CRSP share codes.

11

in the VentureExpert database. We exclude these IPO firms from consideration if the information on the
identity of the investing VCs is unavailable through SDC Platinum. We also exclude IPO firms with
investments from venture capitalists that we were unable to classify in CVC or IVC sub-sets or where the
data on venture investment is inconsistent across two databases. At the end we are left with 5,411 IPO
firms where 2129 are backed by venture capitalists and 462 of latter are backed by corporate venture
capitalists. The characteristics of the IPO firms in our sample are similar to those presented in other IPO
studies (see, e.g., Loughran and Ritter (2003)).12
4. Investment Patterns and Financing Terms of CVCs and IVCs
The first part of our analysis investigates whether the unique institutional features of CVCs prompts
them to invest in different kinds of firms compared to IVCs, and provide funding to firms at different
stages in their life cycle relative to IVCs. Second, we investigate whether the terms of financing offered to
entrepreneurial firms differs across CVCs and IVCs.

4.1

Investment Patterns
There are a number of differences in institutional structure and the objectives of corporate and

independent venture capitalists: while IVCs are primarily concerned with the financial returns from their
portfolio firms, CVCs may also be concerned with other benefits to the corporate parent that may arise
from the investment, such as exposure to a pioneering technology and early establishment of alliances in
the product market. Such non-financial motivations may prompt CVC to invest in younger firms in
familiar industries. Further, the industry and technology expertise of CVCs may allow them to screen
firms better, which may allow them to invest larger amounts in riskier and more R&D intensive firms
(with longer time to achieving profitability) compared to IVC investments. To evaluate these hypotheses
we study the differences in the investment patterns between CVCs and IVCs.

12

The characteristics of IPO firms are not reported and are available upon request.

12

We start with the probit analysis of round investments. The dependant variable is a dummy equal to
1 for financing rounds backed by a CVC and zero otherwise. The independent variables can be classified
into three groups. First, we analyze individual firm-round characteristics such as age of the
entrepreneurial firm at the round date, round number, total amount required by the firm this round (log of
total amount invested this round), and total amount of prior investment. These variables reflect the
maturity of the portfolio firm as younger firms in the earlier rounds of their development are likely to
have small prior investments and hence require larger investments this round.
Second, we consider the entrepreneurial firm industry characteristics. Since we do not observe
balance-sheet data for the portfolio firms we measure their industry characteristics using aggregate
variables for already public firms. Specifically, based on an entrepreneurial firms SIC code we construct
industry-wide variables by averaging the characteristics of public firms in the same industry in the year
prior to the financing round. First, we consider capital and R&D expenditures that are likely to capture the
growth option features of the industry. Second, sales growth over the three years prior to the financing
round reflects past industry growth. Third, we compute the equal-weighted industry portfolio return over
the six month prior to the financing round date to capture the effect of hot versus cold industries. Forth,
we estimate the beta of the industry portfolio over the 36 months prior to the financing round date to
capture the risk of the portfolio firms. Finally, to evaluate the degree of competition faced by the
entrepreneurial firms we compute industry Herfindahl index and the market share of the largest firm in
the industry based on prior year sales. These variables allow us to compare the industry characteristics of
CVC backed versus IVC backed firms.
Third, we consider the reputation of existing IVCs (discussed earlier). Since the dominant share of
venture investments are follow on investments it is important to understand whether CVC are leaders or
followers in an entrepreneurial firm, whether they invest when there is a high reputation IVC is already in
charge or prefer to make the pioneering investment in a firm.
The results of this probit analysis are reported in Table 2a. Panel A presents the results where the
industry characteristics are constructed based on 2 digit SIC code industry definition. Panel B presents the
13

results when industry is defined using the Fama-French industry definition. First, we find that, consistent
with our hypothesis, CVCs tend to invest in younger firms at earlier rounds: the coefficients of firm age
and round number are positive and significant at the 1% level. CVCs also invest in firms that require
significantly larger investments (those with smaller prior investment). Second, CVCs provide funding to
more capital and R&D intensive firms than IVCs. The positive and significant coefficient of industry beta
suggests that CVC-backed firms come from riskier industries. These industries also tend to be more
competitive as the coefficient of the Herfindahl index and market share of the largest firm in the industry
are negative. We dont find robust evidence that prior industry stock return performance or operating
(sales growth) performance significantly affect CVCs choice of portfolio firms. Finally, we find that
CVC tend to invest in firms where the reputation of existing IVCs is relatively low. Since, we control for
the round number of the investment, the positive coefficient of IVC reputation suggests that CVCs are not
followers. Rather, they are more likely to invest in firms that lack high quality independent venture
capitalists: in other words, in firms where their industry expertise will be most appreciated.
In the second part of our analysis of the investment patterns of CVCs and IVCs we evaluate the
match between the CVC and the entrepreneurial firm affects CVCs decision to invest. Specifically, we
attempt to answer two questions. First, are CVCs more likely to invest in firms in an industry related to
that of the CVC parent? Second, does a prior relationship with existing investors in a firm drive CVC
investment in that firm? Again, we evaluate whether CVCs are followers investing in firms with familiar
venture capitalists present or rather invest independent of any prior relationships. To evaluate these
questions we need to observe not only the entrepreneurial firms that obtained CVC investments, but also
those denied such investments. We cannot observe the latter set of firms but we do observe the firms that
obtained IVC (but not CVC) financing. In our analysis we assume that those firms were also potential
recipients of CVC financing. Using these two sub-sets of firms (those receiving CVC investment and
those receiving only IVC investments) we conduct a probit analysis where the dependant variable is
constructed as detailed in Figure 1. We match each CVC round investment with other financing rounds
that occurred within one month of CVC investment date. We assume that this sub-set contains firms that
14

could have received CVC financing but did not receive it. Consequently, the dependant variable in our
probit analysis is equal to one for an investment round backed by CVCs, and zero for investment rounds
in firms that could have received CVC funding, but did not.
In addition to firm characteristics and other control variables considered earlier, we construct two
sets of variables of interest. First, to evaluate whether industry match between a CVC parent and an
entrepreneurial firm drives CVC investment, we construct dummy variables that are equal to one if CVC
corporate parent and the portfolio firm are in the same industry as defined by 2 digit SIC code, 3 digit SIC
code, 4 digit SIC code, and Fama-French industry classification respectively. Second, to evaluate whether
prior relationship with IVCs affect the investment pattern of CVCs, we construct three measures of the
relationship between the investing CVC and an IVC who have already invested in the portfolio company
under consideration: (i) the number of entrepreneurial firms CVC and IVC co-invested in before the
round date under consideration; (ii) the number of financing rounds CVC and IVC co-invested in before
the round date; and (iii) the number of years since first joint investment by the CVC and the IVC. We
then aggregate these variables across all IVCs who have already invested in the portfolio firm.
Table 2b reports the results of our probit analysis. We find that industry match is very important in
CVCs choice of portfolio firms. The coefficients of industry match dummies are positive and significant
independent of industry classification (SIC code or Fama-French industry). Further, the coefficient of
proxies of the prior relationship between CVCs and IVCs are negative, this is also the case for
coefficients of the reputation of existing IVCs. This is consistent with the idea that corporate venture
capitalists tend to step in when the existing IVCs lack reputation (and expertise) to evaluate the
entrepreneurial firms product and/or technology.
Overall, our results in this section suggest that the investment patterns of CVC are significantly
different from that of IVCs. CVCs tend to invest in younger and riskier firms and in earlier rounds
compared to IVCs. These firms tend to be in less mature industries which require significantly larger
R&D and capital expenditures, and which are more competitive (have no dominant firm in the product
market). CVCs are more likely to select portfolio companies in industries closely related to that of their
15

corporate parent. Finally, CVCs do not seem to be mere followers of independent venture capitalists. In
fact they are more likely to invest when the existing IVCs lack knowledge, so that CVCs expertise is
most valuable.

4.2

Terms of Financing of CVC Backed and IVC Backed Firms

The unique features of corporate venture capitalists as compared to independent venture capitalists

might not only generate the investment patterns differences but also lead to different terms of financial
contracting. In this sub-section we compare two characteristics of the CVC and IVC financing rounds:
First, we compare the amount invested by two kinds of venture capitalists in portfolio firms. Since
managers of CVC funds do not enjoy the performance based compensation to the same degree as those of
IVC funds, one might argue that CVCs are likely to exhibit less caution in selecting portfolio companies
and hence invest significantly large amounts of money. Second, we directly evaluate contracting terms by
comparing the valuation across financing rounds with CVC backing with those backed by IVCs alone.
Specifically, we study the difference in the company post-round valuation relative to the amount invested.
This ratio is equivalent to the entrepreneurial firms equity share transferred to VCs for $1million
invested in each round.
Panel A of Table 3 reports the results of the regression analysis of the round amount invested by
various venture capitalists. The dependant variable is the log of the total dollar amount invested in an
entrepreneurial firm by an individual venture capitalist each round. Thus, the unit of observation is firmround-VC. Our main variables of interest are the characteristics of CVC backing: (i) CVC backing
dummy and (ii) CVC-portfolio firm industry match dummy. The latter is equal to one if the corporate
parent for the CVC investor and the portfolio firm are in the same industry as defined by the Fama-French
industry classification. We use a number of control variables in our analysis. First, we control for
entrepreneurial firm-round characteristics: age at the round date, relationship to the internet technology,
round number, and presence of prior CVC investments. Second, we control for the quality of the IVCs
that have already invested in the firms before the round date. Finally, we include year and entrepreneurial
16

firms industry dummies to account for trends in the venture capital industry (e.g., aggregate funding
availability and hot or cold industry preferences).
Consistent with our univariate analysis results, we find that corporate venture capitalists tend to
invest significantly more money than IVCs in a given financing round. This effect is most pronounced for
the sub-set of entrepreneurial firms that are in the same industry as the CVCs corporate parent. This
evidence suggest that CVCs create value for the entrepreneurial firm by providing them with large capital
inflows and showing a significant bias toward financing companies that they can potentially screen and
monitor better (those in an industry related to their corporate parent). In addition, we observe that venture
capitalists, both CVCs and IVCs, tend to invest more in younger, less developed firms, in the later rounds
of their financing. The positive coefficients of the various IVCs reputation proxies is likely to reflect the
fact that more reputable IVCs tend to have larger portfolios (in terms of dollar amount) and hence are
better positioned to invest in firms that require larger capital injections.
Panel B of Table 3 presents the results of our regression analysis of the firm equity share transferred
to the venture capitalists in return for each $1 million investment. The dependant variable is the postround firm value divided by the dollar amount invested by all venture capitalists this round. Thus the unit
of observation is firm-round. The set of the independent variables is similar to that of Panel A. The main
variable of interest is the CVC backing dummy that is equal to one if at least one CVC participated in this
financing round. Since the post-round firm valuation is only available at the firm-round level and there
are a number of rounds with multiple CVCs investing in a firm we cannot disentangle how corporate
venture capitalists value firm in a related industry.
We find that corporate venture capitalists value entrepreneurial firms backed by them significantly
higher than IVCs. Per million dollar invested they receive on average 4.1% less of the entrepreneurial
firms equity than IVCs. Thus, the effect is not only statistically but also economically significant. These
result might reflect the lower bargaining power that CVCs may have with respect to portfolio firms
compared to that of VCs. It is also consistent with CVCs having non-financial motivations as well as
direct financial motivations in investing in portfolio firms.
17

5. Exit Strategies of CVC and IVC Backed Entrepreneurial Firms

This section presents the first set of results pertaining ability of corporate venture capitalists to aid
the entrepreneurial firms in efficiently accessing the equity market. Here we compare the abilities of
CVCs and IVCs in bringing firms backed by them public or in helping them in being acquired.
Specifically we compare CVC and IVC backed firms in terms of going public (IPO firms), being
acquired, being written off (writeoffs), and active investments.13

5.1

Univariate Analysis
Table 4a presents the average characteristics of the CVC backed and IVC backed entrepreneurial

firms by the type of exit. All characteristics are recorded at the date of the exit for IPO firms, acquired
firms, and writeoffs or at the last investment date for the active investments. The table documents a
number of interesting results.
First, we find that CVC backed entrepreneurial firms enjoy higher rates of successful exit (IPO or
acquisition) when compared to IVC backed firms. Over the period from 1980 to 2004, 18.3% of CVC
backed firms went public and 10.2% were acquired while the number for IVC backed firms were 13.3%
and 8.3%, respectively. At the same time, CVCs are associated with a larger share of companies written
off: 22.3% versus 17.9% for IVC backed firms.
Second, consistent with the results documented earlier, we find CVC backed entrepreneurial firms to
be 2.5 to 4 years younger at the exit date (both IPO and acquired firms) than IVC backed firms. The CVC
backed firms also enjoy significantly higher venture capital inflows compared to IVC backed firms:
$56 mil versus $31 mil for IPO firms, $45 mil versus $19 mil for acquired firms, and $38 mil versus
$18 mil for write-offs. Not surprisingly, this higher investment amounts are associated with the larger
number of rounds and the larger number of distinct venture capitalists involved with CVC backed
entrepreneurial firms compared to IVC backed firms. Nevertheless, both CVC and IVC backed firms

13

We consider a firm to be written off if it hasnt received any venture round financing for five years in a row.

18

experience similar time from first venture investment till exit 2.7-2.9 years for acquired firms and 4.2
years for IPO firms.
Third, the reputation of existing IVCs is similar across CVC and IVC backed entrepreneurial firms
that went public; it is also higher for CVC backed firms that were acquired or written off compared to
IVC backed firms. This suggests that CVCs prompt high reputation IVC to co-invest with them.
Finally, Table 4a allows us to compare the characteristics of CVC backing for various sub-samples
of entrepreneurial firms. We find that CVCs on average enter later both in terms of entrepreneurial firms
age and entrance round number into IPO firms compared to entrance into firms that were later acquired or
written off. Further, CVCs invest more in companies that later go public than in those that were later
acquired or written off. In addition, we observe that IPO companies backed by CVCs enjoy a higher
number of VC corporate parents in a related industry compared to IVC backed acquired firms. The latter
suggests that industry match with the corporate parent aids the entrepreneurial firm in going public and
accessing the secondary market.
5.2

Multivariate Analysis of Exit Strategies

The univariate analysis suggests that CVC backed entrepreneurial firms have a higher probability of

successful exit as measured by IPO or acquisition. In this section we present a more rigorous analysis of
the exit strategies where along with CVC backing we control for a number of other firm characteristics
that can potentially affect the likelihood of a firm to have having a successful exit.
Panel A of Table 4b presents a probit analysis of the propensity for a successful exit. The dependant
variable is a dummy equal to 1 if the entrepreneurial firm has an IPO or acquisition and 0 if it is written
off by the venture capitalist. To evaluate the effect of CVC backing, we consider various measures of the
degree of firm backing by corporate venture capitalists (e.g., we want to discriminate between
entrepreneurial firms entirely financed by CVCs versus those that only obtained 5% from CVCs and the
remaining investment was provided by IVCs). Here we control for the reputation of existing independent
venture capitalists, log of total dollar amount invested by all VCs, and the age of the entrepreneurial firm.
19

Further we include a dummy indicating whether the firms product is related to an internet technology and
also include the 6 month equal-weighted return on a portfolio of already public firms in the same FamaFrench industry as the entrepreneurial firm. The latter variable captures the hot market effect (i.e. internetbubble period or hot or cold IPO market year).
While CVC backing does not directly affect an entrepreneurial firms propensity to have a successful
exit, the CVCs presence improves the entrepreneurial firms chances for successful exit indirectly. We
find that the higher the total amount invested by all venture capitalists and the higher the reputation of
existing IVCs, the higher is a firms likelihood of having an IPO or an acquisition. Earlier, we showed
that CVCs tend to invest significantly larger amounts than IVCs. In addition, we can see that CVCs attract
high reputation IVCs to co-invest with them.
In Panel B of Table 4b we conduct a similar probit analysis where we evaluate the propensity of a
firm to have an IPO versus acquisition. We find that CVC backing positively affects the likelihood of a
firm going public both directly (through a number of CVCs) and indirectly (through investing larger
amounts). In Panel C we evaluate the time from first VC investment to exit (IPO or acquisition) for CVCbacked and IVC backed firms. The results show that it takes longer for a CVC backed entrepreneurial
firm to go from the first venture investment to a successful exit.
Overall, our evidence suggests that CVC backed companies are more likely to go have successful
exit than IVC backed firms. Further, the probability of having an IPO rather than an acquisition is greater
for a CVC backed firm. The longer time from first venture capital investment to exit attributed to CVC
backed firms is consistent with our earlier findings that CVCs invest in younger firms, in less mature
industries, and in earlier rounds (which may take longer time to reach profitability).
6. Post-IPO Performance of CVC and IVC Backed Firms
In this section we investigate whether corporate venture capital backing generates higher product
market value for entrepreneurial firms by comparing the post-IPO operating performance of CVC and
IVC backed firms. Our objective here is to determine whether the pool of firms going public with CVC
20

backing is of higher quality (in other words, having the ability to generate superior operating
performance) compared to the pool of firms going public with IVC backing. We also want to conduct a
similar comparison between IPOs with high and low amounts invested by CVCs. In order to study
whether the pool of firms backed by CVCs is different from that of firms backed by IVCs, we use two
measures: post-IPO operating performance and post-IPO delisting probabilities.
6.1

Post-IPO Operating Performance

We compare the operating performance of various IPO sub-samples using two approaches. First, we

compare unadjusted operating performance measures for the full samples of CVC backed versus IVC
backed firms, and high-CVC-investment versus low-CVC-investment firms. Second, we use a matching
approach where each CVC backed (high-CVC-investment) company is matched to an IVC backed (lowCVC-investment) firm based on year, Fama and French (1997) industry, and size measured by total
assets. In doing so, we ensure that each CVC backed (high-CVC-investment) company receives a unique
match. We then compare the operating performance of the two samples of matched firms.14
To measure operating performance, we use the following characteristics: (1) profit margin (net
income including extraordinary items (Compustat item 172) divided by sales); (2) EBITDA as a
percentage of assets (Compustat item 6); (3) EBITDA sales margin; (4) return on assets (net income
including extraordinary items over book value of assets); (5) share of capital expenditures (Compustat
item 128) in assets; (6) share of R&D (Compustat item 46) in assets; and (7) growth in sales.
Tables 5a presents our analysis of the operating performance of various IPO sub-samples. We report
the operating performance characteristics for the pre-IPO year (year 0) and five years post-IPO (1 through
5). Panel A provides median non-adjusted operating performance characteristics calculated using full IPO
sub-samples. Panel B on the other hand gives statistics for the pair-matched sub-samples.
14

It is important to note that, in our setting, it is inappropriate to use the matching firm approach suggested by Barber and
Lyon (1996), which advocates choosing a matching (benchmark) firm based on prior profitability and size. Matching on prior
profitability would be appropriate only if we wished to determine whether there is a change in operating performance of firms
subsequent to the IPO. Since our objective here is to detect differences in the quality (performance) of the pool of firms going
public with CVC backing and those going public with IVC backing, matching on pre-IPO operating performance would be
inappropriate, since this is equivalent to minimizing the quality difference we are attempting to detect.

21

Surprisingly, we find that CVC backed IPOs exhibit significantly lower profitability margins preand post-IPO (years 0 to 4) than do IVC backed companies. However, even though the CVC backed IPOs
are losing money dramatically in the year prior to IPO and in the post IPO years their profitability
improves significantly over four years post-IPO and is statistically insignificant from that of IVC backed
firms five years post-IPO. In addition, CVC backed firms have consistently higher R&D and capital
expenditures as well as sales growth in post-IPO years when compared to IVC backed firms. However,
we find no significant differences in the operating performance characteristics of high-CVC-investment
and low-CVC-investment IPO firms.
Our evidence is inconsistent with the premise that corporate venture capitalists help the
entrepreneurial company to develop product market alliances and reach profitability at an earlier stage in
their life (possibly before the IPO date). It is, however, consistent with CVC backed entrepreneurial firms
being able to go public at a younger stage in their life, and having longer gestation periods prior to
profitability. Further, the higher capital and R&D expenditures as well as higher sales growth that we
document indicate that CVC backed IPO firms have greater growth options compared to IVC backed IPO
firms.
6.2

Post-IPO Delisting Probabilities of CVC Backed and IVC Backed Firms

In addition to the operating performance characteristics of IPO companies, we analyze the

probabilities of delisting of CVC backed and IVC backed firms within 5 years post IPO. Panel A of
Table 5b reports the percentage of IPO companies de-listed due to liquidation (delisting code DLSTCD
between 400 and 499 or between 520 and 600). Panel B reports the share of IPO companies de-listed due
to merger or acquisition (delisting code DLSTCD between 200 and 299). The delisting data comes from
the CRSP Daily Events file. The probability of delisting should be negatively correlated with IPO firms
quality, while the probability of being acquired should be positively correlated with IPO firms quality.
Consistent with our operating performance results, we find that CVC backed IPO firms are more
likely to be delisted within three years post-IPO compared to IVC backed firms. In addition, high-CVC22

investment IPO firms are more likely to be delisted than low-CVC-investment IPO firms within five years
post-IPO. The likelihood of being acquired is similar across CVC and IVC backed firms as well as across
high-CVC-investment and low-CVC-investment IPO firms. Similar to our operating performance results,
this evidence does not directly support the notion that CVCs add greater product market value to the firms
backed by them compared to IVCs. These results, however, are consistent with CVC backed firms going
public at an earlier stage of their development compared to IVC backed IPO firms.

7. Participation of Reputable Underwriters, Institutional Investors, and Analysts in CVC Backed

and IVC Backed IPOs
In this sub-section we analyze CVCs ability to ease entrepreneurial firms access to the secondary
market. Specifically we analyze whether the presence of corporate venture backing in an IPO company
attracts participation by better quality and larger number of various market players in the IPO of CVC
backed firms compared to their participation in IPOs backed by IVCs alone. On the one hand, we
anticipate that IVCs, being more frequent players in the IPO market, will be able to attract better quality
and higher extent of participation by underwriters, institutional investors, and analysts. On the other hand,
CVC backing may signal higher firm quality to these market players, prompting them to participate in the
firms IPO in larger numbers. To evaluate these hypotheses, we compare CVC and IVC backed IPOs in
terms of the reputation of the underwriters involved; the number of institutional investors participating in
IPO; and institutional investor holding as a fraction of IPO shares sold; the extent of analyst coverage
immediately post-IPO; and the reputation of IVCs investing in the firm (recall that many CVC backed
firms also have IVCs coinvesting with them)..

7.1

Participation by Reputable Underwriters

In this sub-section we study the reputation of underwriters associated with CVC and IVC backed

IPOs. Panel A of Table 6a reports the summary statistics of average underwriter reputation associated
with different IPO sub-samples. We use two measures of underwriter reputation. First, we analyze the

23

measure of underwriter reputation used by Loughran and Ritter (2003). Second, similar to Loughran and
Ritter (2003), we use a dummy for the underwriter reputation that takes a value of 1 if the reputation
measure is 8 or higher.
Our results show that the average underwriter reputation for CVC backed firms is higher than that
for IVC backed firms (8.02 versus 7.45). The percentages of the companies with a high-reputation
underwriter are 82% for CVC backed issuers versus 67.9% for IVC backed issuers. The evidence clearly
suggests that CVC backed IPOs are associated with higher quality underwriters compared to IVC backed
IPOs. The differences are statistically significant at the 1% level.
In addition to the univariate analysis we conduct a regression analysis that allows us to control for
various other factors affecting quality of underwriters. Along the traditional control variables such as size
(log of total assets) and share of the firm equity sold in IPO we include: (i) reputation of existing IVCs;
(ii) operating performance characteristics. We argue that presence of IVCs co-investing with CVCs might
affect quality of underwriters (as well as other reputable market players). In addition, higher quality
underwriters might be more selective in choosing IPO companies to run books for and are likely to back
higher quality (as measured by profitability and/or growth) firms. Panel A of Table 6b presents the results
of the regression analysis. Consistent with the univariate analysis results we find that CVC backing
improves quality of underwriters for IPO firms. Furthermore, the higher the CVC share of total venture
investment in an IPO firm, the better the underwriters quality.
7.2

Participation by Institutional Investors

In this sub-section we analyze the influence of corporate venture capitalists on institutional investors

participation in IPOs backed by them. We study two measures of institutional investors involvement in
IPOs. First, we evaluate the number of institutional investors investing in an IPO firm. Second, we look at
first quarter post-IPO institutional investor holdings as a percentage of the number of shares sold in the
IPO. We obtain institutional investors holdings data for IPOs in years 1980 to 2004 from the Spectrum
Institutional (13f) Holdings Database of Thomson Financial.
24

Panel B of Table 6a reports the results of our analysis of institutional investors participation
measures. The measures are unanimous. Relative to IVC backed IPOs, CVC backed IPOs have around
19% higher percentage of shares sold in the IPO held by institutional investors, and 7.6 more institutional
investors involved. These differences are not only statistically but also economically significant.
Since the degree of institutional investors participation may also be affected by better quality
underwriters (in addition to venture capital backing), IVC backing, and quality of an IPO firm going
public, we control for these effects through a regression analysis of institutional investor participation
reported in Panel B of Table 6b. In this analysis we find that the presence of corporate venture backing
adds 3.37 additional institutional investors to the IPO firm; each additional CVC investor brings on
average of 2 more institutional investors. Furthermore, the degree of participation by institutional
investors is positively related to the CVC amount invested in a company normalized by total venture
investment, and the presence of a CVC parent(s) in an industry related to the IPO firm. The positive sign
of the size coefficient suggests that institutional investors are indeed more likely to invest in bigger IPOs.
7.3

Analyst Coverage of IPO Firms

In Panel C of Table 6a we present a univariate analysis of analyst coverage of IPO firms. The data is

taken from the I/B/E/S database. We evaluate a percentage of IPOs with analysts coverage as well as the
number of distinct analysts issuing annual forecasts within a year after a firms IPO date.15 The number of
analysts is assigned to be zero if there is no information about the company in I/B/E/S.
We find that a significantly larger percentage of CVC backed firms receive analyst coverage and that
these firms are followed by a larger number of analysts compared to IVC backed IPO firms. We find that
analysts follow 93% of CVC backed IPOs versus 86% of IVC backed IPOs. CVC backed firms also enjoy
roughly 1.7 more analyst following than IVC backed firms.

15

We also conduct the analyst coverage analysis based on quarterly earning forecasts in I/B/E/S and obtain qualitatively similar
results.

25

In the regression analysis presented in Panel C of Table 6b, we control for numerous factors that are
likely to affect analyst coverage along with CVC backing. Here the dependent variable is the number of
analysts following the firm within a year after its IPO date. We find that the presence of corporate venture
capitalists, number of CVCs, share invested by CVC relative to total venture investment, and the presence
of a corporate parent in an industry similar to that of the IPO firm positively affect analysts following.
The effects are both economically and statistically significant.

7.4

Participation of IVCs in CVC Backed IPO Firms

Finally, we analyze the quality (reputation) of independent venture capitalists co-investing with the

CVC in IPO firms. We compare four distinct measures of the independent venture capitalist reputation
across CVC and IVC backed IPOs: (i) average age of IVCs backing an IPO firm; (ii) dollar amount
invested by these IVCs since 1965; (iii) average number of rounds the IVCs participated in since 1965;
and (iv) dollar amount of funds raised over 5 years prior to IPO. To construct these IVC reputation
proxies we use data reported in the VentureExpert database of SDC Platinum. We find that the average
reputation of IVCs co-investing with corporate venture capitalists is no different from that investing in
firms backed by IVCs alone.
7.5

Summary and Interpretation of Results

Contradictory to what one might expect from the fact that IVCs are more frequent players in the IPO

market compared to CVCs, we find that the extent and quality of participation by various market players
are higher for CVC backed IPOs than for IVC backed IPOs. The underwriter reputation, participation by
institutional investors, and analyst coverage are higher for CVC backed IPOs compared to IVC backed
IPOs even after we control for various other factors that can potentially affect the participation of
reputable market players. Furthermore, the reputation of IVCs co-investing with CVCs in CVC backed
IPO firms is similar (i.e., not lower than) the reputation of IVCs investing in IPO firms backed by IVCs
alone. The fact that despite bringing younger firms, further away from profitability (on average) to the

26

IPO market, CVCs are able to attract greater participation by more reputable market players indicates a
signaling role of CVC backing in IPOs: i.e., backing by CVCs with superior industry knowledge seems to
effectively communicate to various other market players that the IPO firms backed by them are high
quality firms with good future prospects.

8. Valuation of CVC Backed and IVC Backed Firms at IPO

In this section we study stock valuation of CVC backed and IVC backed IPOs. In an IPO market
characterized by significant asymmetric information between firms issuing equity and outside investors,
the ability of financial intermediaries such as venture capitalists to credibly communicate information
about the true values of firms backed by them becomes very important. The analysis of the valuations of
CVC and IVC backed IPO firms allows us to compare the ability of these two kinds of venture capitalists
to reduce the degree of asymmetric information in the IPO market. One would expect firms backed by the
intermediary with a greater ability to communicate their private information about the future prospects of
the firm going public to equity market investors to be awarded higher valuations.
8.1

Methodologies Used to Compute Intrinsic Firm Value

The first approach we use to estimate the intrinsic value of IPO companies is a matching technique

based on an industry peer with comparable Sales and EBITDA profit margin (EBITDA/Sales) similar to
that used by Purnanandam and Swaminathan (2005). Here we limit our consideration to the subset of IPO
(and matching public firms) that have positive EBITDA and Sales. We first consider all firms in
Compustat that were active and present on CRSP for at least three years at the end of the fiscal year
preceding the IPO. We then eliminate firms that are REITs, closed-end funds, ADRs, not ordinary
common shares, and firms with stock prices less than $5 at the report date. We separate the remaining
population of Compustat firms into 48 industry groups based on the industry classification introduced by

27

Fama and French (1997).16 For each year, we divide each industry portfolio into three portfolios based on
sales, and then separate each sales portfolio into three portfolios based on EBITDA profit margin
(EBITDA/Sales). This procedure gives us nine portfolios for each industry-year.17 Each IPO firm is then
placed into an appropriate year-industry-Sales-EBITDA margin portfolio based on an IPO firms sales
and EBITDA in year prior to IPO. Within the portfolio, we find a matching company that is closest in
sales to the IPO firm being valued. We then estimate the intrinsic value of the IPO firms based on the
price multiples of their matching firms.
The offer price to the intrinsic value ratio for each IPO firm (OP/IV) is calculated by dividing the
offer price multiple by the comparable firm multiple. The offer price multiples are computed as follows:
Offer Price CRSP Shares Outstanding
OP

=
Prior Fiscal Year Sales
Sales IPO

(1.1)

Offer Pric e CRSP Shares Outstanding

OP

=
Prior Fiscal Year EBITDA
EBITDA IPO

(1.2)

Offer Pric e CRSP Shares Outstanding

OP

=
Prior Fiscal Year Earnings
E IPO

(1.3)

In the above, CRSP shares outstanding refers to the shares outstanding of the IPO firm at the first
secondary market trading day as recorded in CRSP. The price multiples for a matching firm are computed
as follows:
Market Price CRSP Shares Outstanding
P
=

Prior Fiscal Year Sales

Sales Match

(2.1)

P
Market Price CRSP Shares Outstanding

EBITDA
Prior Fiscal Year EBITDA

Match

(2.2)

Market Price CRSP Shares Outstanding

P
=

Prior Fiscal Year Earn ings
E Match

(2.3)

16
The industry portfolios are constructed using 4 digits SIC codes from Compustat. For robustness, we also implement this
methodology using 2-digit SIC codes as industry classification criteria.
17
We insist, however, that at least three firms should be in each portfolio. If the number of firms in the industry does not allow us
to form 9 portfolios, we limit the separation to two portfolios based on Sales with further separation into two portfolios based on
EBITDA profit margin, sometimes we consider only one portfolio.

28

Market price is CRSP stock price and CRSP shares outstanding is the number of shares outstanding
of the matching firm at the close of the day closest to the IPO offer date. OP/IV ratios for each IPO firm
based on various multiples are then computed as follows:18
(OP/Sales) IPO
OP
=

IV Sales (P/Sales) Match

(3.1)

(OP/EBITDA) IPO
OP
=

IV EBITDA (P/EBITDA) Match

(3.2)

(OP/E) IPO
OP
=

IV Earnings (P/E) Match

(3.3)

In addition to the comparable firm approach discussed above, we compute the intrinsic value of IPO
firms using the discounted cash flow method introduced by Ohlson (1990). Here we do not require IPO
firms to have positive sales and EBITDA in the year preceding the IPO. Thus, the discounted cash flow
approach we implement only requires the book value of equity and earnings (whether positive or
negative) to be available for three years post IPO. It also requires the calculated intrinsic value to be
positive. Following Ohlson (1990), the fair value of a firms shares is calculated as follows:
IV = B0 +

EPS 1 r * B0 EPS 2 r * B1
+
+ TV .
1+ r
(1 + r ) 2

(4)

Here B0 is the book value of issuer at the end of IPO year (annual Compustat item 60) divided by
CRSP end of year number of shares outstanding; EPS is income before extraordinary items available to
common shareholders (annual Compustat item 237) divided by CRSP number of shares outstanding; r is
the required rate of return on firms equity. We assume a constant required rate of return r of 13%. TV,
the terminal value is calculated as follows:
TV =

( EPS 2 r * B1 ) + ( EPS 3 r * B2 )
1
*
2
(1 + r ) 2 * ( r g )

(5)

The terminal value is calculated as an average to avoid the effect of unusual performance in year 3.
Constant earnings growth g (5% and 0% are considered) is assumed after year 3 and the terminal value of

18

If earnings are missing or negative for the matching firm (in the case of earnings based valuation), the closest Compustat firm
with no missing data is used as the matching firm.

29

the stock is calculated as a perpetuity. If the terminal value is negative, we set it equal to zero, since
managers are unlikely to continue negative NPV projects forever.
8.2

Univariate Analysis
Table 7a reports the relationships between the IPO firms valuation at the offer price (OP), the first

trading day secondary market price (SMP), and the estimated intrinsic value ratio (IV) across various subsamples of IPOs. Panel A presents median underpricing (SMP/OP), Panel B median offer price to
intrinsic value ratio (O/IV), and Panel C median secondary market price to intrinsic value ratio
(SMP/IV). The size of the sample changes for the valuations using different price multiples due to
unavailability of data on the balance-sheet variables for the IPO companies.
Our results show that regardless of the methodology used to compute the intrinsic value for IPO
firms, both OP/IV and SMP/IV ratios are significantly higher for CVC backed firms than for IVC backed
firms. Median CVC backed IPO is valued higher than median IVC backed IPO by 40 to 216 percentage
points at the offer price and by 50 to 300 percentage points at the first day secondary market price. These
differences are statistically significant at the 1% level.

8.3

Multivariate Analysis
In addition to the above univariate analysis, we also implement a multivariate regression analysis of

IPO valuation both at the offer price and at the first trading day secondary market price to investigate the
combined influence of corporate venture capitalists, independent venture capitalists, and various other
market participants on the valuation of IPOs. Table 7b reports the results of this analysis. The dependent
variable is the log of the OP/IV ratio. To analyze the influence of CVC backing on the valuation of IPO
companies, we consider four independent variables reflecting the degree of CVC participation in the
entrepreneurial firm: CVC backing dummy, number of CVCs, CVC share of total VC investment, and the
number of CVCs corporate parents in the same 2 digit SIC code with that of an IPO firm. These variables
are set to zero for IPO firms backed by IVCs alone. The set of independent variables also includes the

30

IVC backing dummy, and the reputation of existing IVCs, and measures of participation by various other
market players.. As control variables we employ size (log of total assets), share of firm equity sold in the
IPO, various operating performance characteristics of IPO firms, industry dummies, and year dummies.
We find that the presence of CVC backing an IPO firm increases the valuation of this firm at the
offer price (relative to an industry peer) by 35% on average. Similarly, each additional CVC backing the
entrepreneurial firm going public causes on average 13% increase in valuation. Finally, the backing by an
additional CVC with its corporate parent in the same Fama-French industry as the IPO firm increases this
firms valuation by roughly 11%.
Our univariate and multivariate analysis of IPO firms valuation at both offer price and the secondary
market price suggest that corporate venture capitalists are able to credibly convey the information about
future prospect of the IPO firms backed by them to both IPO and secondary market participants. Further,
the higher valuation assigned by the IPO market to CVC backed firms may reflects the higher value of
their growth options relative to that of IVCs backed IPO firms.
8.4

Long-Run Post-IPO Stock Returns of CVC Backed and IVC Backed Firms
The higher valuation awarded to CVC backed firms relative to IVC backed firms at the IPO and

secondary market may arise from temporary misvaluation in the equity market rather than from the
superior ability of CVCs to communicate the true value of firms backed by them to various equity market
participants. In the former scenario, however, one would expect CVC backed firms to underperform IVC
backed firms in terms of long-run stock returns, as the temporary misevaluations are corrected over time.
We therefore compare the five year stock return performance of CVC backed and IVC backed firms to
rule out the misvaluation scenario.
We compare the intercepts of the Fama and French (1993) three-factor model based on the calendartime monthly portfolio returns of CVC backed and IVC backed IPO firms. We construct the calendartime portfolio returns by averaging monthly returns of firms that went public within 60 month of the
return date. Table 8 present the results of our analysis. Following earlier stock return studies, along with
31

the portfolios of CVC backed firms and IVC backed firms we consider a hedge portfolio consisting of a
long position in CVC backed IPOs and a short position in IVC backed IPOs (CVC-IVC portfolio).
Similarly we construct LCVC-HCVC portfolio that corresponds to a long position in low-CVCinvestment firms and a short position in high-CVC-investment firms. Panel A presents the OLS
coefficient estimates for equal-weighted portfolios of IPO firms. Panel B presents the coefficient
estimates from the WLS regression for the value-weighted portfolios of IPO firms.
The results are qualitatively and quantitatively similar across panels. We find that over the five-year
horizon post IPO CVC backed firms outperform IVC backed firms by 1.1 percentage point on a monthly
basis. This translates into 13.2% better stock performance annually. We find no evidence that the sub-set
of IPOs with larger investment by corporate venture capitalists experience significantly higher/lower
stock return performance within six years post-IPO.
Overall, our evidence supports the idea that the higher valuation we documented earlier for CVCbacked firms is not the result of a temporary overvaluation of these firms at the time of IPO. Rather, our
evidence indicates that CVCs are able to better convey the true value of firms backed by them to various
participants in the equity market.
9. Conclusion
In this paper we have analyzed how corporate venture capitalists (CVCs) create value for
entrepreneurial firms backed by them and how value creation by CVCs differs from that of independent
venture capitalists (IVCs). Making use of a large data set consisting of a sample of CVC-backed and IVCbacked firms (starting from their first round of investment in an entrepreneurial firm and going well into
the post-IPO market), we explored three related research questions: First, do CVCs exploit their
knowledge and industry expertise when choosing portfolio firms, and invest in significantly different
kinds of firms compared to independent venture capitalists (IVCs)? Second, do they succeed in creating
greater product market value subsequent to investment compared to IVCs? Finally, do they allow
portfolio firms to access the equity market more efficiently?
32

Our findings can be summarized as follows. First, compared to IVCs, CVCs invest in smaller,
younger, more R&D intensive firms, and in earlier rounds; CVC portfolio firms are typically in industries
related to their corporate parents. Second, CVCs invest significantly larger amounts while getting smaller
equity fractions in return compared to IVCs. Third, even though CVC backed firms have a higher
probability of a successful exit (IPO or acquisition), they exhibit significantly lower post-IPO operating
performance compared to IVC backed firms, and are more likely to be de-listed in the years immediately
after IPO. However, CVC backed firms are characterized by greater growth rates in the post-IPO period
than IVC-backed firms. Fourth, CVC-backed firms enjoy greater analyst coverage, higher reputation IPO
underwriters, and larger post-IPO institutional investor holdings: even the reputation of the IVCs coinvesting in CVC backed firms is no less than that of IVCs investing in firms backed by IVCs alone.
Finally, CVC-backed firms have higher IPO market valuations and long-term post-IPO stock returns
compared to IVC backed firms.
Overall, our results indicate that CVCs uniquely create value in two different ways: First, by
investing in earlier stage firms involving pioneering technologies which may not otherwise be able to
obtain private equity funding. Second, by giving CVC backed firms more efficient access to the equity
market by credibly communicating the true value of firms backed by them to three different
constituencies: first, to IVCs, prompting them to co-invest in these firms pre-IPO; second, to various
financial market players such as underwriters, institutional investors, and analysts, allowing them to
access the equity market at an earlier stage in their life-cycle compared to firms backed by IVCs alone;
and third, directly to IPO market investors, allowing CVC-backed firms to obtain higher IPO market
valuations compared to the valuation of firms backed by IVCs alone.

33

References
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from the Going Public Process, Working Paper.
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Backed IPOs, forthcoming in Journal of Financial Economics.
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Intermediation, The Journal of Finance, Vol. XXXII, pp. 371-388. Reprinted in Bhattacharya and
Constantinides 1989, pp. 255-271.
34

Lindsey, L., 2004, The Venture Capital Keiretsu Effect: An Empirical Analysis of Strategic Alliances
Among Portfolio Firms, Working Paper.
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entrepreneurial millennium, John Wiley & Sons.
Megginson, M., and K. Weiss, 1991, Venture Capital Certification in Initial Public Offerings, Journal
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Purnanandam, A. K., and B. Swaminathan, 2004, "Are IPOs Really Underpriced?" Review of Financial
Studies, Vol. 17, pp. 811-848.
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Paper.

35

Table 1
Summary Statistics for Venture Capital Financing Rounds
This table reports the descriptive statistics for the sample of individual investments by various venture capitalists from 1980 to 2004. Panel A presents the characteristics of CVC investments in
entrepreneurial firms with at least one CVC investors (CVC backed firms). Panel B presents the characteristics of IVC investments in CVC backed entrepreneurial firms. Panel C presents IVC
investments in entrepreneurial firms backed by IVCs alone (non-CVC backed firms). The main data source is VentureExpert database of SDC Platinum. The data was cross-references with other data
sources (e.g., Jay Ritter data on firm age, SDC Platinum IPO list, D&B dataset, and CorpTech Explore database).

Panel A: CVC Round

Investments in CVC
Backed Companies
Num of
Obs
Mean
St Dev.
Firm Age at Round Date
6882
8.61
10.64
Round Number (Sequence)
7180
2.36
2.24
Round Number of Investors
7180
6.25
4.37
VC Investment This Round ($ mil.)
6767
3.59
8.77
VC Investment This Round Relative to Total Round Amount (%)
6740
29.17
28.38
Total Round Amount ($ mil.)
6866
18.37
26.22
VC Investment This Round Relative to Total VC Investment (%)
6754
10.56
15.22
Company Post Round Valuation ($ mil)
3158 124.14
186.47
Firm Investment This Round Relative to Post Round Valuation (%)
3104
6.34
18.62
Reputation of Existing IVCs:
Age
7180
12.88
7.19
Fund Raised Over Past 5 Years ($ mil)
6886 431.39
658.86
Fund Raised Since 1965 ($ mil)
6957 533.47
841.21
Number of Rounds Participated Since 1965
7180 400.95
454.98
Total Amount Invested Since 1965 ($ mil)
7179 530.45
771.72

40

Panel B: IVC Round

Investments in CVC
Backed Companies
Num of
Obs
Mean St Dev.
43077
14.21
14.16
45122
3.93
2.67
45122
7.19
4.96
43404
2.12
4.53
43149
23.85
25.86
43816
14.17
20.63
43383
4.81
7.32
18801
96.60
141.32
18524
6.25
9.36
45122
44539
44759
45122
45122

13.73
474.29
592.35
435.68
590.46

6.65
585.45
734.62
464.30
766.71

Panel C: IVC Round

Investments in non-CVC
Backed Companies
Num of Obs
105044
110663
110663
103516
102794
104180
103374
29030
28492
110662
106054
107498
110663
110654

Mean
13.33
3.12
4.55
2.04
39.56
8.04
14.25
55.14
12.44

St Dev.
11.96
2.44
3.69
9.43
34.32
23.44
22.21
110.44
420.31

13.22
372.09
492.55
396.93
536.92

8.03
672.82
939.55
555.48
979.95

Table 2a
Patterns of Corporate Venture Capital Investments:
Effect of Firm and Industry Characteristics
This table reports the results of the probit analysis that explores corporate venture capitalists investment patterns. The dataset contain round by
round investments by CVCs and IVCs from 1980 to 2004. The dependant variable is equal to 1 for first CVC-firm round of financing, and it is
equal to 0 for all IVC rounds that occur prior to CVC entrance (post CVC entrance rounds are excluded from consideration). The independent
variables are (i) entrepreneurial firm characteristics; (ii) entrepreneurial firm industry characteristics; (iii) reputation of the existing IVCs at the
financing round; and (iv) other control variables. The main data source is VentureExpert database of SDC Platinum. The data was crossreferences with other data sources (e.g., Jay Ritter data on firm age, SDC Platinum IPO list, D&B dataset, and CorpTech Explore database). The
t-statistics are reported in parentheses. ***, **, and * indicate significance of t-statistics at the 1, 5, and 10 percent levels, respectively.

Firm Characteristics
Firm Age at Round Date
Round Number
Log Dollar Amount Invested
This Round
Log Total Prior Investment

Panel A: 2 Digit SIC Industry Definition

(1)
(2)
(3)
(4)

Panel B: Fama-French Industry Definition

(5)
(6)
(7)
(8)

-0.0136
(5.10)***
-0.0332
(3.03)***
0.2941
(21.50)***
-0.0094
(1.93)*

Average Industry Characteristics

Capital Expenditures 1.3682
(1.57)
R&D 0.0397
(2.97)***
Sales Growth Over Past 3 0.0034
Years (0.37)
Return on Industry Portfolio 0.0141
Over Prior 6 Month (0.28)
Beta 0.0632
(3.24)***
Herfindahl Index -0.4188
(1.97)**
Largest Market Share (Sales)
Average Reputation of Existing IVCs
IVCs Age -0.0193
(6.73)***
Total Number of Rounds
Invested
Total Amount Invested
($mil.)

-0.0148
(5.58)***
-0.0367
(3.38)***
0.2840
(21.62)***
-0.0090
(1.87)*

-0.0145
(5.50)***
-0.0377
(3.48)***
0.2881
(21.51)***
-0.0087
(1.80)*

-0.0136
(5.10)***
-0.0336
(3.06)***
0.2936
(21.48)***
-0.0093
(1.90)*

-0.0159
(4.97)***
-0.0336
(3.52)***
0.3009
(23.86)***
-0.0107
(2.59)***

-0.0171
(5.22)***
-0.0362
(3.83)***
0.2934
(24.07)***
-0.0107
(2.59)***

-0.0168
(5.17)***
-0.0369
(3.92)***
0.2977
(24.04)***
-0.0102
(2.47)**

-0.0159
(4.93)***
-0.0335
(3.51)***
0.3015
(23.90)***
-0.0108
(2.60)***

1.5402
(1.83)*
0.0396
(2.97)***
0.0052
(0.50)
0.0020
(0.04)
0.0702
(3.62)***
-0.4457
(2.11)**

1.7033
(2.03)**
0.0394
(2.96)***
0.0033
(0.24)
0.0020
(0.04)
0.0708
(3.65)***
-0.4076
(1.96)*

1.3111
(1.50)
0.0378
(2.81)***
0.0034
(0.39)
0.0151
(0.30)
0.0648
(3.32)***

1.9497
(3.43)***
0.0337
(3.83)***
0.2761
(3.28)***
0.0448
(1.20)
0.0533
(2.99)***
-0.6936
(2.20)**

2.0667
(3.75)***
0.0340
(3.88)***
0.2544
(3.04)***
0.0271
(0.72)
0.0574
(3.24)***
-0.6804
(2.18)**

2.1261
(3.86)***
0.0335
(3.82)***
0.2297
(2.72)***
0.0195
(0.52)
0.0583
(3.29)***
-0.6273
(1.99)**

1.9823
(3.47)***
0.0353
(3.99)***
0.2643
(3.12)***
0.0440
(1.18)
0.0540
(3.06)***

-0.3871
(2.29)**
-0.0194
(6.75)***

-0.3897
(2.46)**
-0.0164
(7.18)***

-0.0002
(5.03)***

-0.0165
(7.22)***
-0.0002
(6.70)***

-0.0001
(5.03)***

-0.0001
(6.67)***

Internet Company Dummy

0.0895
(2.23)**

0.1066
(2.65)***

0.1053
(2.60)***

0.0873
(2.17)**

0.1392
(4.51)***

0.1496
(4.84)***

0.1474
(4.75)***

0.1326
(4.39)***

Startup/Seed Stage at First

Round of VC Financing

0.2332
(3.14)***

0.2441
(3.30)***

0.2351
(3.19)***

0.2336
(3.14)***

0.2499
(3.90)***

0.2585
(4.04)***

0.2466
(3.87)***

0.2472
(3.86)***

Early Stage at First Round of

VC Financing

0.3985
(5.28)***

0.4081
(5.42)***

0.3936
(5.25)***

0.3971
(5.26)***

0.3407
(4.85)***

0.3541
(5.04)***

0.3356
(4.79)***

0.3394
(4.83)***

Expansion Stage at First

Round of VC Financing

0.2462
(3.53)***

0.2616
(3.76)***

0.2545
(3.67)***

0.2461
(3.53)***

0.2142
(3.39)***

0.2314
(3.66)***

0.2196
(3.49)***

0.2122
(3.36)***

Later Stage at First Round of

VC Financing
Log Likelyhood
Pseudo R2
Observations

0.2377
(3.64)***
3503
0.12
19370

0.2485
(3.83)***
3523
0.12
19370

0.2428
(3.76)***
3524
0.12
19370

0.2384
(3.66)***
3502
0.12
19370

0.2252
(3.88)***
5005
0.12
26359

0.2375
(4.10)***
5022
0.12
26358

0.2289
(3.97)***
5023
0.12
26358

0.2228
(3.84)***
5005
0.12
26359

40

Table 2b
Patterns of Corporate Venture Capital Investments:
Effect of Match Between CVC and Entrepreneurial Firm
This table reports the results of the probit analysis that explores corporate venture capitalists investment patterns. The dataset contain round by
round investments by CVCs and IVCs from 1980 to 2004 where each CVC investment is uniquely paired with entrepreneurial firm. The
dependant variable is equal to 1 if a CVC invested into a company, and it is equal to 0 id CVC did not invest into a company but it received an
IVC investment (only companies that received round financing within 1 month of CVC investment date are considered). The independent
variables are (i) industry match between CVC and entrepreneurial company (dummies for same SIC code or Fama-French industry); (ii) CVC
familiarity with existing IVC investors; (iii) reputation of the existing IVCs at the financing round; and (iv) other control variables. The t-statistics
are reported in parentheses. ***, **, and * indicate significance of t-statistics at the 1, 5, and 10 percent levels, respectively.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
CVC and Company Industry Relationship
4 digit SIC 0.1027
0.0862
0.0912
0.0906
0.1028
0.1032
(3.45)***
(2.71)***
(3.08)***
(3.08)***
(3.45)***
(3.47)***
3 digit SIC 0.0449
0.0403
0.0494
0.0523
0.0444
0.0441
(1.29)
(1.15)
(1.44)
(1.53)
(1.28)
(1.26)
2 digit SIC 0.1540
0.1615
0.1516
0.1480
0.1557
0.1547
(3.91)***
(4.33)***
(3.95)***
(3.89)***
(3.99)***
(3.94)***
CVC and Company Industry
0.1304
Relationship
FF Industry
(4.97)***
IVCs CVCs Relationship
Sum of Existing VCs and CVC -0.0001
-0.0001
-0.0001
-0.0001
-0.0001
Relationship Years
(3.21)***
(3.83)***
(1.87)*
(1.59)
(2.78)***
Sum of Existing VCs and CVC
-0.0001
Co-Investments (# of Firms)
(4.03)***
Sum of Existing VCs and CVC
-0.0003
Co-Investments (# of Rounds)
(3.74)***
Reputation of Existing IVCs
Avg Age of Existing VCs
-0.0123
-0.0123
-0.0124
-0.0119
(6.85)***
(6.79)***
(6.92)***
(6.71)***
Avg Funds Raised by Existing
-0.1125
VCs since 1965 ($ mil.)
(4.46)***
Avg Rounds Invested by
-0.0002
Existing VCs since 1965
(7.59)***
Avg Amount Invested by
-0.0011
Existing VCs since 1965 ($ mil.)
(6.27)***
Firm Characteristics
Firm Age at Round Date
-0.0094
-0.0115
-0.0113
-0.0112
-0.0095
-0.0094
-0.0087
(4.32)***
(4.54)***
(5.01)***
(4.95)***
(4.31)***
(4.31)***
(4.20)***
Internet Dummy
-0.1820
-0.1749
-0.1721
-0.1698
-0.1806
-0.1811
-0.1588
(6.69)***
(6.98)***
(6.41)***
(6.44)***
(6.58)***
(6.59)***
(5.63)***
Round number
-0.0026
-0.0055
-0.0063
-0.0075
-0.0029
-0.0030
-0.0030
(0.45)
(0.88)
(1.09)
(1.29)
(0.48)
(0.51)
(0.52)
Prior Investment Dummy
-0.1727
-0.1722
-0.1795
-0.1770
-0.1735
-0.1736
-0.1696
(6.49)***
(5.71)***
(6.64)***
(6.55)***
(6.55)***
(6.57)***
(6.33)***
Log (Round Amount, $)
0.1031
0.1124
0.1018
0.1085
0.1042
0.1038
0.1004
(15.08)***
(12.09)***
(14.35)***
(13.59)***
(16.04)***
(15.99)***
(14.93)***
Other Control Variables
6 month Prior Return in
-0.0001
-0.0001
-0.0001
-0.0001
-0.0001
-0.0001
-0.0001
Company Industry (2SIC/FF)
(1.78)*
(1.59)
(1.57)
(1.70)*
(1.77)*
(1.76)*
(12.78)***
-0.3256
-0.0547
-0.3061
-0.3079
-0.3291
-0.3284
-0.3277
Startup/Seed Stage at First
Round of VC Financing
(2.02)**
(0.26)
(1.92)*
(1.93)*
(2.04)**
(2.04)**
(2.10)**
Early Stage at First Round of
-0.2540
0.0167
-0.2233
-0.2372
-0.2558
-0.2557
-0.2578
VC Financing
(1.56)
(0.08)
(1.39)
(1.48)
(1.57)
(1.57)
(1.64)
Expansion Stage at First Round
-0.4585
-0.1980
-0.4257
-0.4294
-0.4610
-0.4607
-0.4678
of VC Financing
(2.84)***
(0.95)
(2.67)***
(2.69)***
(2.86)***
(2.85)***
(3.00)***
Later Stage at First Round of
-0.4038
-0.1354
-0.3839
-0.3838
-0.4063
-0.4058
-0.4103
VC Financing
(2.54)**
(0.64)
(2.44)**
(2.44)**
(2.56)**
(2.55)**
(2.67)***
Company Related Industry
+
+
+
+
+
+
+
Dummies (2SIC/FF)
Observations
2,003,060
1,830,481
2,003,091
2,003,091
2,003,060
2,003,060
2,003,083
Pseudo R2
0.1349
0.1479
0.1367
0.1378
0.1352
0.1351
0.1302
Log Likelyhood
18,863
17,492
18,824
18,799
18,856
18,859
18,966

41

Table 3
Amount Invested and Pricing of Financing Rounds
This table reports the table reports the results of the regression analysis of venture capital financing round terms. The dataset contain round by
round investments by CVCs and IVCs from 1980 to 2004. Panel A presents the analysis of the amount invested by IVCs and CVCs each
financing round. The dependant variable is log of dollar amount invested by venture capitalists. The unit of observation is firm-round-venture
capitalist. Panel B analyzes the share of the entrepreneurial company transferred to venture capitalists for each $1mil. invested. The unit of
observation is firm-rounds. Round of financing is considered to be CVC backed if there is at least one CVC investor in this round. The main data
source is VentureExpert database of SDC Platinum. The data was cross-references with other data sources (e.g., Jay Ritter data on firm age, SDC
Platinum IPO list, D&B dataset, and CorpTech Explore database). The t-statistics are reported in parentheses. ***, **, and * indicate significance
of t-statistics at the 1, 5, and 10 percent levels, respectively.

CVC Backing Dummy

CVC Industry Match
(Fama-French Industry)
Firm Age at Round Date
Internet Dummy
Round Number
Prior CVC Rounds Dummy
Average Reputation of Existing IVCs
Age

Panel A: Log Dollar Amount

Invested by VCs Each Round
(1)
(2)
(3)

Panel B: Firms Share Transferred to

VCs for $1mil. Investment Each Round
(4)
(5)
(6)

0.475
(21.73)***
0.284
(7.54)***
-0.004
(3.56)***
0.080
(7.71)***
-0.098
(47.74)***
-0.138
(7.38)***

-0.041
(3.94)***

-0.041
(3.61)***

-0.041
(3.76)***

-0.003
(2.95)***
-0.016
(1.56)
-0.010
(3.00)***
0.010
(1.69)*

-0.003
(2.71)***
-0.012
(1.17)
-0.010
(2.45)**
0.009
(1.64)

-0.003
(2.76)***
-0.014
(1.33)
-0.010
(2.60)***
0.010
(1.78)*

0.384
(10.06)***
0.172
(2.64)***
-0.003
(2.49)**
0.063
(5.46)***
-0.120
(49.47)***
-0.175
(5.46)***

0.382
(11.22)***
0.256
(4.39)***
-0.004
(3.91)***
0.083
(7.34)***
-0.119
(52.75)***
-0.090
(3.31)***

0.006
(16.43)***

5-year Funds Raised ($mil.)

0.001
(2.81)***
0.002
(43.54)***

0.007
(0.91)

Total Funds Raised ($mil.)

Startup/Seed Stage at First Round of VC
Financing
Early Stage at First Round of VC
Financing
Expansion Stage at First Round of VC
Financing
Later Stage at First Round of VC
Financing
Year and Industry Dummies
Observations
R-squared

-0.125
(6.44)***
0.001
(0.05)
0.140
(9.92)***
0.150
(9.77)***
+
94,593
0.30

0.003
(36.20)***
-0.118
(5.56)***
0.013
(0.73)
0.123
(8.07)***
0.136
(8.12)***
+
72,298
0.33

-0.122
(5.57)***
0.006
(0.35)
0.128
(8.10)***
0.135
(7.82)***
+
67,174
0.33

42

-0.186
(3.03)***
0.020
(0.20)
-0.158
(2.25)**
-0.186
(2.86)***
+
12,769
0.04

-0.194
(3.03)***
-0.008
(0.07)
-0.174
(2.35)**
-0.198
(2.90)***
+
11,534
0.04

0.006
(1.75)*
-0.191
(3.04)***
-0.002
(0.02)
-0.170
(2.35)**
-0.194
(2.91)***
+
11,799
0.04

Table 4a
Exit Strategies for CVC Backed and IVC Backed Firms:
Univariate Analysis
This table reports the descriptive statistics for the success rates and exit strategies of entrepreneurial firms with venture capital backing from 1980 to 2004. Panel A presents the characteristics of firms
that went public; Panel B looks at the acquired firms; Panel C presents the characteristics of firms that were written-off by venture capitalists; and Panel D presents active investments. An
entrepreneurial firm is considered to be CVC backed if it has at least one CVC investor, and IVC backed if it enjoyed only IVC investments. The main data source is VentureExpert database of SDC
Platinum. The data was cross-references with other data sources (e.g., Jay Ritter data on firm age, SDC Platinum IPO list, D&B dataset, and CorpTech Explore database). ***, **, and * indicate
significance of t-statistics for the test of difference in means between two samples at the 1, 5, and 10 percent levels, respectively.

Number of Portfolio Firms

Share of Portfolio Firms

Panel A: IPO Firms

CVC
IVC
Difference
590
2585
18.289
13.32 4.969***

Round Number of CVC Entrance

3.068
Firms Age at CVC Entrance Date
4.323
CVC Amount Invested ($mil.)
10.364
CVCs Share in All VC Investments (%)
21.656
Number of CVC Investors
1.517
Number of CVC Investors in the Same Industry
2 digit SIC
0.853
3 digit SIC
0.691
4 digit SIC
0.379
Fama-French industry
0.842
Year From First Investment to Exit
Firm Age at Exit Date
Percentage of Internet Companies
Total Number of VC Invetsors
Total Number of Rounds
Total Amount Invested by All VCs ($mil.)
Average Reputation of Existing IVCs
Age
Total Amount Invested Since 1965 ($mil.)
Number of Financed Rounds
Funds Raised Over 5 Years ($mil.)
Funds Raised Since 1965 ($mil.)

4.235
5.902
42.881
20.949
5.195
56.352

4.128
9.839
19.072
9.146
3.304
31.476

14.421
451.131
383.386
420.230
600.385

14.663
425.802
337.095
392.855
564.085

0.108
-3.938***
23.810***
11.803***
1.891***
24.876***
-0.242
25.329*
46.291*
27.375*
36.300

Panel B: Acquired Firms

CVC
IVC
Difference
328
1620
10.1674
8.3475 1.820***

Panel C: Writeoffs
CVC
IVC
Difference
721
3462
22.3497
17.839 4.511***

Panel D: Active investments

CVC
IVC
Difference
1587
11740
49.194
60.494 -11.30***

2.427
2.490
6.931
22.151
1.360

2.632
3.685
5.583
19.386
1.408

2.357
3.719
5.822
22.197
1.332

0.571
0.405
0.119
0.602

0.621
0.443
0.152
0.629

0.645
0.514
0.192
0.693

2.947
4.959
66.159
16.058
3.957
45.196

2.776
7.387
39.877
6.945
2.691
19.274

0.172
-2.427***
26.282***
9.113***
1.266***
25.922***

4.401
6.654
52.705
18.132
4.433
38.367

3.963
9.231
27.499
8.322
3.090
18.171

0.438***
-2.576***
25.206***
9.810***
1.343***
20.197***

6.821
5.455
55.829
14.744
3.945
40.678

8.321
7.069
31.797
5.608
2.453
14.100

-1.501***
-1.614***
24.031***
9.135***
1.493***
26.579***

13.836
906.988
563.809
690.291
831.413

15.246
692.629
488.062
531.699
624.995

-1.411***
214.359**
75.747*
158.592**
206.418**

14.427
859.048
534.652
652.828
808.808

14.729
627.278
430.046
491.966
620.453

-0.302
231.771**
104.606**
160.862***
188.355**

13.379
989.780
594.415
630.473
739.198

13.416
734.091
465.823
494.915
604.497

-0.037
255.688**
128.593***
135.558**
134.701**

40

Table 4b
Exit Strategies for CVC Backed and IVC Backed Firms:
Multivariate Analysis
This table reports the multivariate analysis of the success rates and exit strategies of entrepreneurial firms with venture capital backing from 1980 to 2004. Panel A presents probit analysis of propensity
of an entrepreneurial firm for successful exit (IPO or Acquisition). The dependant variable is 1 for entrepreneurial firms that went public or were acquired and 0 if the VC investment was written off.
Panel B presents probit analysis of propensity of an entrepreneurial firm to have IPO vs Acquisition. The dependant variable is 1 for entrepreneurial firms that went public and 0 for acquired firms.
Panel C presents the regression analysis of the number of years from first VC investment till successful exit (IPO or Acquisition). An entrepreneurial firm is considered to be CVC backed if it has at
least one CVC investor, and IVC backed if it enjoyed only IVC investments. The t-statistics are reported in parentheses. ***, **, and * indicate significance of t-statistics for the test of difference in
means between two samples at the 1, 5, and 10 percent levels, respectively.
Panel A: Propensity for Successful Exit
(1)
(2)
(3)
(4)

Panel B: Propensity to Have IPO vs. Acquisition

(5)
(6)
(7)
(8)

IPO/ Acquisition Dummy

CVC Backing Dummy

0.011
(0.14)

CVC Share of Total VC

Investment
CVC Originated
Investment Dummy
Number of CVC
CVC-Firm Industry Match
Log(Total Amount
Invested by VCs)
Company Age at First
Investment Date
Internet Dummy
Avg Age of Existing IVCs
6-month EW Return of FF
Industry Portfolio
Startup/Seed Stage at First
Round of VC Financing
Early Stage at First Round
of VC Financing
Expansion Stage at First
Round of VC Financing
Later Stage at First Round
of VC Financing
Observations
R-squared

-0.681
(5.77)***
0.714
(4.09)***

-0.065
(0.85)
0.285
(1.46)

0.510
(2.39)**
0.061
(0.63)

-0.008
(0.09)
0.222
(17.63)***
0.011
(4.60)***
0.654
(8.37)***
0.012
(4.33)***
0.767
(7.99)***
-0.506
(7.58)***
-0.455
(7.55)***
-0.275
(5.24)***
-0.030
(0.42)
5645
-

-0.041
(0.55)
0.222
(17.82)***
0.011
(4.62)***
0.652
(8.36)***
0.013
(4.39)***
0.764
(7.96)***
-0.508
(7.60)***
-0.456
(7.56)***
-0.273
(5.20)***
-0.029
(0.41)
5645
-

Panel C: Time From First VC Investment to Exit

(9)
(10)
(11)
(12)

-0.013
(0.17)
0.222
(17.81)***
0.011
(4.60)***
0.655
(8.39)***
0.012
(4.35)***
0.767
(7.99)***
-0.508
(7.59)***
-0.456
(7.56)***
-0.275
(5.23)***
-0.030
(0.42)
5645
-

-0.687
(5.82)***

0.057
(0.88)
0.089
(6.24)***
-0.011
(4.53)***
0.298
(4.46)***
0.002
(1.00)
0.783
(7.38)***
-0.739
(8.58)***
-0.617
(8.35)***
-0.510
(8.77)***
-0.363
(5.06)***
3714
-

-0.039
(0.67)
0.088
(6.24)***
-0.011
(4.44)***
0.287
(4.30)***
0.003
(1.20)
0.779
(7.35)***
-0.748
(8.69)***
-0.629
(8.48)***
-0.512
(8.81)***
-0.371
(5.17)***
3714
-

40

-0.684
(5.80)***

-0.392
(1.92)*
-0.099
(0.95)

-0.006
(0.10)
0.004
(0.04)
0.222
(17.63)***
0.011
(4.60)***
0.654
(8.36)***
0.012
(4.33)***
0.768
(8.00)***
-0.505
(7.57)***
-0.455
(7.55)***
-0.275
(5.24)***
-0.029
(0.42)
5645
-

-0.689
(5.83)***

0.040
(0.72)
0.087
(6.24)***
-0.011
(4.50)***
0.294
(4.42)***
0.002
(0.97)
0.782
(7.37)***
-0.736
(8.55)***
-0.616
(8.33)***
-0.510
(8.77)***
-0.365
(5.09)***
3714
-

0.102
(0.43)
-0.024
(0.41)
0.051
(0.62)
0.088
(6.20)***
-0.011
(4.51)***
0.296
(4.44)***
0.002
(1.02)
0.782
(7.37)***
-0.740
(8.59)***
-0.619
(8.38)***
-0.511
(8.78)***
-0.365
(5.09)***
3714
-

-0.269
(2.83)***
0.205
(4.93)***
0.078
(8.70)***
-1.050
(6.91)***
0.037
(4.50)***
-0.912
(3.81)***
0.481
(2.34)**
0.215
(1.23)
0.502
(3.49)***
0.629
(3.47)***
3648
0.13

-0.111
(2.45)***
0.226
(5.53)***
0.076
(8.54)***
-1.005
(6.60)***
0.035
(4.40)***
-0.884
(3.70)***
0.499
(2.44)**
0.250
(1.42)
0.514
(3.57)***
0.667
(3.67)***
3648
0.13

-0.048
(2.52)***
0.226
(5.54)***
0.077
(8.55)***
-1.012
(6.68)***
0.036
(4.44)***
-0.890
(3.72)***
0.492
(2.40)**
0.240
(1.36)
0.513
(3.56)***
0.662
(3.64)***
3648
0.13

0.555
(4.13)***
-0.543
(2.88)***
0.207
(5.03)***
0.078
(8.66)***
-1.060
(6.96)***
0.036
(4.53)***
-0.907
(3.80)***
0.489
(2.39)**
0.235
(1.34)
0.504
(3.51)***
0.635
(3.51)***
3648
0.13

Table 5a
Post IPO Operating of CVC Backed and IVC Backed Firms
This table reports median profitability measures, sales growth rates, and other measures of operating performance for 5 years after the IPO date.
Compustat data items for these ratios are: Profit Margin (Net Income (172)/Sales (12)), EBITDA (13)/Total Assets (6), EBITDA (13)/Sales (12),
Return on Assets (Net Income (172)/Total Assets (6)), CE/Total Assets (Capital expenditure (128)/ Total Assets (6)), and R&D/Total Assets
(R&D Expense (46) / Total Assets (6)). CVC stands for IPO firms with at least one CVC investor. IVC represents IPO firms backed by IVCs
alone. HCVC stands for IPO firms where the CVCs share in total VC investment is above 20% while LCVC stands for the IPO firms with
small financial presence of CVCs (below 15%).Panel A presents statistics for the full sub-samples of IPOs. Diff in Panel A represents the
differential in median between two sub-samples. Panel B presents performance differences where each CVC (HCVC) backed IPO is matched to
IVC (LCVC) backed IPO firm. The matching company has to have closest total assets, and be within the same year and industry as defined by
Fama and French (1997). Diff in Panel B represent the median of differences in performance characteristics for matched firms. ***, **, and *
indicate significance at the 1, 5, and 10 percent levels, respectively, for Wilcoxon-Mann-Whitney rank sum test.
Year

Panel A: Full IPO Sub-samples (%)

CVC

IVC

Diff.

HCVC

0
1
2
3
4
5

-33.02
-14.03
-15.36
-14.68
-8.12
-3.91

11.79
10.49
9.22
7.81
7.83
9.35

-44.81***
-24.52***
-24.59***
-22.49***
-15.95***
-13.25***

-34.95
-14.16
-17.61
-19.48
-12.65
-6.99

0
1
2
3
4
5

-75.76
-70.80
-65.82
-62.07
-30.79
-15.74

1.75
3.64
2.24
0.94
0.58
0.80

-77.51***
-74.44***
-68.06***
-63.02***
-31.37***
-16.54***

-63.05
-95.28
-87.91
-91.02
-47.30
-22.48

0
1
2
3
4
5

-67.17
-62.47
-46.53
-37.25
-15.33
-6.43

8.46
10.26
9.26
7.77
7.36
8.16

-75.63***
-72.73***
-55.79***
-45.02***
-22.68***
-14.59***

-57.10
-70.34
-63.39
-62.78
-29.45
-15.18

0
1
2
3
4
5

-38.70
-14.36
-20.06
-23.06
-14.88
-9.88

1.95
3.58
2.30
0.71
0.58
0.95

-40.65***
-17.93***
-22.36***
-23.78***
-15.46***
-10.83***

-40.97
-13.98
-20.34
-23.92
-21.75
-12.06

0
1
2
3
4
5

6.83
3.94
4.86
4.34
3.49
3.71

6.47
4.75
5.88
5.09
4.47
4.30

0.36
-0.80***
-1.02***
-0.74***
-0.98***
-0.59***

7.69
3.85
5.60
4.23
3.59
3.35

0
1
2
3
4
5

36.82
30.51
31.19
30.59
22.74
21.25

8.27
7.43
8.79
8.76
8.87
7.55

28.55***
23.08***
22.40***
21.82***
13.87***
13.70***

32.75
30.51
35.76
32.65
25.41
24.61

0
1
2
3
4
5

214.48
203.90
155.81
118.89
120.67
117.73

158.55
155.23
137.65
124.73
117.20
115.40

55.93***
48.67***
18.16***
-5.84**
3.47
2.33

235.34
195.15
171.96
110.64
116.29
118.09

LCVC

Panel B: Matched IPO Sub-samples (%)

Diff.

CVC

I. EBITDA/Total Assets
-31.70
-3.25
-34.64
-13.85
-0.31
-13.43
-14.94
-2.66*
-14.74
-13.23
-6.25*
-14.18
-5.56
-7.10**
-7.86
-2.47
-4.52*
-3.32
II. Profit Margin
-85.03
21.98
-81.42
-65.54
-29.75*
-68.44
-60.50
-27.40
-60.65
-53.24
-37.78** -55.11
-20.09
-27.21** -29.09
-11.33
-11.16
-12.53
III. Sales Margin
-74.93
17.84
-73.83
-61.59
-8.75
-61.22
-42.78
-20.60
-42.46
-24.78
-38.00*
-35.39
-6.67
-22.77** -14.31
-1.85
-13.32*
-4.52
IV. ROA
-35.56
-5.41
-39.46
-14.45
0.48*
-13.79
-21.12
0.79
-19.03
-23.74
-0.18*
-22.21
-9.65
-12.10** -14.64
-7.65
-4.41
-8.09
V. CE in Total Assets
6.69
1.00**
7.00
4.14
-0.29
4.00
4.81
0.80
4.80
4.17
0.06
4.35
3.44
0.15
3.58
3.91
-0.56
3.71
VI. R&D in Total Assets
41.96
-9.22**
37.38
33.73
-3.22
30.51
32.33
3.43
30.77
31.50
1.15
29.63
22.65
2.76
23.94
20.95
3.66
21.06
VII. Growth in Sales
204.59 30.75
214.48
208.06 -12.91
203.47
149.56 22.40
153.57
121.93
-11.30*
117.58
123.72 -7.43*
118.87
119.38
-1.28
116.06

40

IVC

Diff.

HCVC

LCVC

Diff.

-3.97
1.19
-1.60
-1.90
1.33
3.45

-19.93***
-8.50***
-5.67***
-5.79***
-4.47***
-0.91

-43.86
-15.81
-19.36
-20.01
-12.15
-7.56

-40.47
-17.10
-16.52
-13.21
-8.00
-5.04

-0.93
3.77
-6.67
-3.47*
-0.17
-3.18

-11.10
-3.09
-10.45
-13.87
-7.99
-5.80

-23.17***
-14.31***
-8.87***
-10.39***
-7.19***
-2.73

-74.29
-87.09
-89.50
-67.37
-54.09
-19.45

-132.28
-85.70
-57.42
-67.28
-30.79
-22.82

14.78*
1.21
19.31
-2.97
-12.86**
-7.84

0.06
4.30
-1.49
-2.10
1.68
3.87

-26.86***
-20.69***
-8.76***
-10.75***
-6.74***
-0.39

-73.34
-68.36
-61.51
-51.42
-30.27
-15.38

-115.98
-69.59
-40.90
-35.49
-13.55
-8.61

16.46*
9.60
0.15
-11.55*
-6.53
-4.53

-15.55
-2.35
-8.30
-9.96
-6.80
-5.67

-15.88***
-4.68***
-4.61***
-5.24***
-3.91**
-2.98

-53.37
-18.30
-22.69
-23.72
-22.93
-12.06

-45.15
-17.04
-24.34
-25.79
-10.04
-10.69

-7.14
3.14
0.82
0.71
-5.27*
-1.60

6.29
3.95
4.76
4.07
3.39
3.27

0.06
0.19*
0.33**
0.85***
0.32**
0.18**

8.35
3.69
5.58
5.17
3.93
3.82

6.83
4.31
4.82
4.17
2.54
3.33

1.28*
-0.34
0.58
0.23
1.11**
0.14

16.73
16.11
16.83
17.81
15.34
16.78

8.86***
7.32***
6.64***
5.07***
3.31***
4.54***

37.09
28.28
32.52
31.33
29.75
26.24

52.25
36.59
31.23
30.53
26.75
26.12

-9.00*
-3.15
-3.40
-2.34
3.44
0.69

175.44
172.37
140.70
121.30
116.45
108.52

35.47**
21.01***
14.82***
-4.79
4.30
7.73

239.50
203.47
177.12
105.20
116.29
118.29

227.55
260.97
153.81
110.03
113.59
119.86

17.87
-20.12**
10.44
1.99
0.48
-7.17

Table 5b
Probability of Delisting for CVC Backed and IVC Backed Firms
This table reports share of IPO companies de-listed within 1 through 5 years in the post IPO period. Panel A reports the percentage of IPO
companies delisted due to liquidation (delisting code DLSTCD between 400 and 499 or between 520 and 600). Panel B reports share of IPO
companies delisted due to merge or acquisition (delisting code DLSTCD between 200 and 299). The delisting data are from CRSP. CVC stands
for IPO firms with at least one CVC investor. IVC represents IPO firms backed by IVCs alone. HCVC stands for IPO firms where the CVCs
share in total VC investment is above 20% while LCVC stands for the IPO firms with small financial presence of CVCs (below 15%). ***, **,
and * indicate significance of reported t-statistics at the 1, 5, and 10 percent levels, respectively.

Year

CVC

1
2
3
4
5

0.22
4.37
6.99
9.83
11.57

1
2
3
4
5

1.97
9.61
15.72
20.74
24.02

IVC

Diff.
T-stat
HCVC
LCVC
Diff.
Panel A: Share Delisting Due to Liquidation (%)
0.18
0.04
0.15
0.00
0.41
-0.41
2.56
1.80***
2.02
8.23
2.85
5.38***
4.94
2.04*
1.71
11.39
5.28
6.11***
7.44
2.38
1.66
15.82
7.72
8.10***
10.07
1.50
0.93
18.35
8.54
9.82***
Panel B: Share Delisting Due to Merger or Acquisition (%)
1.77
0.20
0.28
0.63
2.85
-2.21
7.50
2.10
1.47
6.33
10.98
-4.65
14.34
1.38
0.74
12.03
17.48
-5.45
19.71
1.04
0.49
18.99
21.14
-2.15
25.32
-1.30
0.57
22.15
23.98
-1.83

41

T-stat
-0.80
2.45
2.26
2.56
2.95
1.56
1.58
1.48
0.52
0.42

Table 6a
Market Participants in CVC Backed and IVC Backed IPOs:
Univariate Tests
This table reports the cross-sectional distribution of underwriter reputation, institutional investor participation, analyst coverage, and venture
capitalists reputation for IPOs from 1980 to 2004. Panel A presents the analysis of underwriter reputation according to the Carter-Manaster
reputation measure updated by Loughran and Ritter (2002). It reports the percentage of IPOs with high-reputation underwriter (ranking of 8 or
higher) and average underwriter reputation for each IPO sub-sample. Panel B presents institutional investor participation statistics. It reports the
number of the institutional investors with IPO allocations, the institutional investor holdings as a percentage of shares sold in an IPO. Panel C
reports the degree of analyst coverage. CVC stands for IPO firms with at least one CVC investor. IVC represents IPO firms backed by IVCs
alone. HCVC stands for IPO firms where the CVCs share in total VC investment is above 20% while LCVC stands for the IPO firms with
small financial presence of CVCs (below 15%). ***, **, and * indicate significance at the 1, 5, and 10 percent levels, respectively, for t-test of
the equality of means of two sub-samples. The IPO and underwriter data are from SDC. The institutional investor holdings data are from
Spectrum Institutional (13f) Holdings Database of Thomson Financial. The analyst forecast data are from the I/B/E/S database. The measures of
venture capitalists reputation are computed based on Venture Expert data from SDC Platinum.

Measure

CVC
IVC
Diff.
Panel A: Underwriter Reputation

HCVC

% of IPOs with Highly Reputable

82.10
67.91
14.19*** 79.75
Underwriter
Average Underwriter Reputation
8.02
7.45
0.56***
7.91
Panel B: Institutional Investor Participation
Number of Institutional Investors
26.87
19.21
7.66***
27.50
Participating in IPO
Institutional Investor Holdings as %
86.11
67.03
19.08*** 86.90
of Shares Sold in IPO
Panel C: Analyst Coverage
Percentage of IPOs with Analyst
93.7
86.1
7.6***
88.1
Coverage
Number of Analysts Following
5.77
4.08
1.69***
6.06
Panel D: Reputation of Existing IVCs
VC Amount Invested Since 1965
VC Average Age
VC Funds Raised During 5 Years
Prior to IPO
VC Rounds Invested

LCVC

Diff.

84.15

-4.40

8.06

-0.15

26.85

0.65

88.00

-1.10

95.1

-7.00***

5.64

0.43

452.59
15.49

479.07
14.97

-26.48
0.52

450.57
14.87

436.89
15.99

13.68
-1.12

435.55

379.22

56.33*

425.20

434.25

-9.05

423.08

366.04

57.04**

425.02

415.80

9.22

42

Table 6b
Market Participants in CVC Backed and IVC Backed IPOs: Multivariate Tests
This table reports the results of the regression analysis of various market participants in IPOs between 1980 and 2004. Panel A presents the analysis of underwriter reputation using Carter-Manaster
reputation measure as dependant variable. Panel B presents the results with the institutional investor participation measured by the number of institutional investors with IPO holdings. Panel C reports
the analyst coverage measured by the number of analysts following an IPO. The independent variables are the VC backing dummy, the CVC backing dummy, number of CVCs, CVC share of total
amount invested by VCs, number of CVC in the same Fama French industry as the IPO firm (CVC Industry Match), underwriter reputation, number of analysts following the firm in the first year after
the IPO, and the number of institutional investors participating in the IPO. The control variables are size (log of Total Assets), share of the firm sold in IPO, size of VC investment (log of total amount
invested by all VCs), IPO firm operating performance characteristics prior to IPO, industry dummies, and year dummies. Robust t-statistics are reported in parentheses. ***, **, and * indicate
significance at the 1, 5, and 10 percent levels, respectively.

Panel A: Underwriter Reputation

(1)
VC Backing Dummy
CVC Backing Dummy

0.326
(2.54)**
0.206
(2.82)***

Number of CVC

(2)

(3)

(4)

0.325
(2.53)**

0.321
(2.49)**

0.324
(2.52)**

Share of Firm Sold in IPO

Log(Total Amount Invested
by VCs)
EBITDA/Sales
CE in Total Assets
R&D In Total Assets
Observations
R-squared

-1.063
(1.00)
3.370
(4.38)***

(6)
-1.018
(0.96)

(7)
-1.293
(1.22)

0.080
(2.31)***

0.008
(2.69)***
1.089
(43.16)***
-0.529
(3.35)***
0.043
(3.38)***
0.567
(1.97)**
0.565
(2.11)**
0.009
(2.42)**
4180
0.47

-1.044
(0.99)

Panel C: Analyst Coverage

(9)
0.487
(2.01)**
0.961
(4.09)***

0.008
(2.69)***
1.089
(43.15)***
-0.533
(3.32)***
0.044
(3.50)***
0.546
(1.86)*
0.566
(2.12)**
0.009
(2.30)**
4180
0.47

(10)
0.500
(2.07)**

9.040
(3.60)***

0.008
(2.65)***
1.089
(43.14)***
-0.531
(3.37)***
0.044
(3.46)***
0.540
(1.83)*
0.566
(2.12)**
0.009
(2.27)**
4180
0.47

0.899
(8.89)***
0.038
(1.44)
6.405
(20.30)***
0.652
(0.56)
0.227
(1.90)*
-0.086
(0.05)
-0.936
(0.59)
-0.001
(0.03)
4180
0.54

0.907
(8.99)***
0.037
(1.40)
6.378
(20.22)***
0.761
(0.66)
0.230
(1.94)*
0.394
(0.22)
-0.964
(0.61)
0.006
(0.24)
4180
0.54

40

(11)
0.417
(1.80)*

(12)
0.502
(2.08)**

0.561
(3.97)***

0.058
(1.09)

0.008
(2.70)***
1.089
(43.25)***
-0.526
(3.46)***
0.040
(3.16)***
0.573
(1.99)**
0.564
(2.11)**
0.009
(2.44)**
4180
0.47

(8)

1.978
(4.82)***

Underwriter Reputation

Log (Total Assets)

(5)

0.051
(1.41)

CVC Share of Total VC

Investment
CVC Industry Match

Avg Age of Existing IVCs

Panel B: Institutional Investor Participation

0.916
(9.07)***
0.042
(1.59)
6.386
(20.23)***
0.736
(0.67)
0.276
(2.34)**
-0.061
(0.04)
-0.959
(0.60)
-0.001
(0.03)
4180
0.54

2.785
(2.30)**
2.415
(3.74)***
0.911
(9.04)***
0.033
(1.26)
6.374
(20.20)***
0.692
(0.59)
0.267
(2.26)**
-0.666
(0.38)
-0.942
(0.59)
-0.008
(0.34)
4180
0.54

0.198
(8.56)***
-0.001
(0.13)
1.119
(17.42)***
-0.941
(2.91)***
0.029
(1.18)
-0.120
(0.27)
0.348
(0.92)
-0.003
(0.43)
4180
0.42

0.200
(8.70)***
-0.001
(0.19)
1.112
(17.36)***
-0.910
(2.78)***
0.030
(1.24)
0.015
(0.03)
0.340
(0.90)
-0.001
(0.13)
4180
0.42

0.203
(8.77)***
0.000
(0.07)
1.114
(17.32)***
-0.912
(2.58)***
0.042
(1.72)*
-0.100
(0.26)
0.339
(0.90)
-0.002
(0.46)
4180
0.42

0.999
(4.27)***
0.200
(8.71)***
-0.003
(0.40)
1.109
(17.33)***
-0.907
(2.99)***
0.036
(1.52)
-0.290
(0.61)
0.340
(0.91)
-0.005
(0.74)
4180
0.43

Table 7a
Valuation of CVC Backed and IVC Backed IPOs: Univariate Tests
This table reports the cross-sectional distribution of the relationship between offer price (OP), first trading day secondary market price (SMP), and intrinsic value (IV) for IPOs from 1980 to 2004.
Panel A reports underpricing. Panel B reports ratio of the offer price to intrinsic value. Panel C reports ratio of the first trading day secondary market price to intrinsic value (SMP/IV). The intrinsic
value is the fair value of the IPO firm computed based on (i) market price-to-sales, market price-to-EBITDA, or market price-to-earnings ratios of an industry peer (the industry peer is a comparable
publicly traded firm in the same Fama and French (1997) industry as the IPO firm and has the closest sales and EBITDA profit margin (EBITDA/Sales) in the pre-IPO fiscal year. OP/IV is the ratio of
the offer price to the estimated intrinsic value of an IPO stock), and (ii) using residual income model (RIM) of Ohlson (1990). CVC stands for IPO firms with at least one CVC investor. IVC
represents IPO firms backed by IVCs alone. HCVC stands for IPO firms where the CVCs share in total VC investment is above 20% while LCVC stands for the IPO firms with small financial
presence of CVCs (below 15%). Wilcoxon p-value corresponds to the Wilcoxon rank sum test for median OP/IV equal to 1. ***, **, and * indicate significance at the 1, 5, and 10 percent levels,
respectively, for Wilcoxon-Mann-Whitney rank sum test for the equality of medians of two sub-samples. Overall represents the aggregate sample of IPOs across years. The IPOs are from SDC
Platinum and all other data are from CRSP and Compustat.

Sample Size
Diff
Z-stat
CVC IVC
HCVC LCVC Diff
Panel A: Underpricing (SMP/OP)
458
1639
1.219
1.149
0.07
1.182
1.083
Underpricing
0.10*** (6.02)
Panel B: Ratio of Offer Price to Intrinsic Value (OP/IV)
5.063
2.901
2.16*** (5.63)
413
1482
5.666
4.982
0.68
Sales Price Multiple
3.843
2.268
1.57*** (3.40)
113
998
4.963
3.279
1.68*
EBITDA Price Multiple
2.498
2.098
0.40
(1.17)
91
848
2.031
2.613
-0.58
Earnings Price Multiple
3.844
2.267
1.58*** (3.42)
113
996
4.964
3.281
1.68*
Enterprise Value Price Multiple
7.466
5.974
1.49
(0.94)
86
657
8.173
6.987
1.19
RIM r=13%, g=5%
7.816
6.679
1.14
(0.91)
85
651
8.173
7.895
0.28
RIM r=13%, g=0%
Panel C: Ratio of First trading Day Secondary Market Price to Intrinsic Value (SMP/IV)
6.296
3.266
3.03*** (6.60)
413
1482
8.506
5.622
2.88
Sales Price Multiple
4.381
2.560
1.82*** (3.72)
113
998
6.623
4.283
2.34*
EBITDA Price Multiple
2.946
2.451
0.50*
(1.56)
91
848
2.469
3.109
-0.64
Earnings Price Multiple
4.383
2.548
1.84*** (3.74)
113
996
6.623
4.284
2.34*
Enterprise Value Price Multiple
8.124
6.675
1.45
(1.15)
86
657
9.249
7.448
1.80
RIM r=13%, g=5%
9.058
7.645
1.41
(1.13)
85
651
9.268
8.610
0.66
RIM r=13%, g=0%
CVC

IVC

40

Z-stat

Sample Size
HCVC LCVC

(1.27)

158

246

(0.16)
(1.38)
(1.16)
(1.38)
(0.08)
(0.09)

135
34
27
34
28
28

227
65
52
65
46
45

(0.42)
(1.55)
(1.12)
(1.55)
(0.10)
(0.14)

135
34
27
34
28
28

227
65
52
65
46
45

Table 7b
Valuation of CVC Backed and IVC Backed IPOs: Multivariate Tests
This table reports the results of the regression analysis of the IPO firms valuation at the offer price. The dependent variable is the log of the offer price to intrinsic value ratio log(OP/IV). The OP/IV
ratio is generated by the basic comparable firm approach using the Sales price multiple. The independent variables are the VC backing dummy, the CVC backing dummy, number of CVCs, CVC share
of total amount invested by VCs, number of CVC in the same Fama French industry as the IPO firm (CVC Industry Match), underwriter reputation, number of analysts following the firm in the first
year after the IPO, and the number of institutional investors participating in the IPO. The control variables are size (log of Total Assets), share of the firm sold in IPO, size of VC investment (log of total
amount invested by all VCs), IPO firm operating performance characteristics prior to IPO, industry dummies, and year dummies. Robust t-statistics are reported in parentheses. ***, **, and * indicate
significance at the 1, 5, and 10 percent levels, respectively.

VC Backing Dummy
CVC Backing Dummy

(1)
0.368
(3.28)***
0.351
(3.79)***

Number of CVC

(2)
0.366
(3.25)***

(4)
0.363
(3.20)***

Log (Total Assets)

Log(Total Amnt Invested by
VCs)
Share of Firm Sold in IPO
EBITDA/Sales
CE in Total Assets
R&D In Total Assets
Observations
R-squared

(6)
0.384
(3.39)***

(7)
0.376
(3.29)***

(8)
0.381
(3.35)***

(9)
0.371
(3.30)***
0.281
(3.06)***

0.104
(2.41)**
0.407
(1.47)

(10)
0.369
(3.27)***

0.061
(4.36)***

0.062
(4.45)***

0.063
(4.48)***

0.108
(1.99)**
0.063
(4.47)***

0.006
(1.73)*
-0.222
(8.21)***
0.008
(0.67)
-1.275
(4.04)***
-0.006
(0.24)
0.242
(0.84)
-0.010
(0.31)
3750
0.16

0.006
(1.73)*
-0.224
(8.30)***
0.011
(0.93)
-1.273
(3.93)***
-0.006
(0.24)
0.243
(0.84)
-0.010
(0.31)
3750
0.16

0.005
(1.67)*
-0.224
(8.26)***
0.014
(1.22)
-1.278
(3.85)***
-0.007
(0.28)
0.246
(0.85)
-0.011
(0.35)
3750
0.16

0.006
(1.79)*
-0.224
(8.28)***
0.014
(1.21)
-1.281
(3.92)***
-0.007
(0.27)
0.247
(0.86)
-0.011
(0.34)
3750
0.16

(12)
0.365
(3.22)***

0.238
(0.85)

0.045
(3.23)***
0.017
(8.95)***

0.046
(3.30)***
0.017
(8.97)***

0.046
(3.30)***
0.018
(9.13)***

0.071
(1.88)*
0.046
(3.30)***
0.017
(9.11)***

0.006
(1.93)*
-0.334
(11.63)***
0.004
(0.35)
-1.297
(3.91)***
-0.007
(0.28)
0.287
(1.00)
-0.011
(0.35)
3750
0.18

0.006
(1.93)*
-0.337
(11.73)***
0.007
(0.60)
-1.296
(3.81)***
-0.007
(0.28)
0.289
(1.00)
-0.011
(0.35)
3750
0.18

0.006
(1.90)*
-0.339
(11.77)***
0.010
(0.84)
-1.302
(3.75)***
-0.008
(0.31)
0.292
(1.01)
-0.012
(0.39)
3750
0.18

0.006
(1.98)**
-0.339
(11.77)***
0.010
(0.83)
-1.304
(3.79)***
-0.008
(0.31)
0.293
(1.02)
-0.012
(0.38)
3750
0.18

41

(11)
0.361
(3.18)***

0.091
(2.11)**
0.259
(0.93)

Number of Institutional
Investors
Number of Analysts
Avg Age of Existing IVCs

(5)
0.386
(3.42)***
0.298
(3.24)***

0.134
(3.01)***

CVC Share of Total VC

Investment
CVC Industry Match
Underwriter Reputation

(3)
0.355
(3.12)***

0.040
(2.88)***
0.015
(7.31)***
0.035
(4.10)***
0.006
(1.93)*
-0.357
(12.23)***
0.003
(0.28)
-1.266
(3.93)***
-0.007
(0.30)
0.259
(0.90)
-0.011
(0.37)
3750
0.18

0.041
(2.95)***
0.015
(7.35)***
0.035
(4.09)***
0.006
(1.93)*
-0.360
(12.33)***
0.006
(0.54)
-1.266
(3.83)***
-0.008
(0.31)
0.262
(0.91)
-0.012
(0.38)
3750
0.18

0.041
(2.94)***
0.015
(7.42)***
0.036
(4.25)***
0.006
(1.90)*
-0.362
(12.40)***
0.009
(0.74)
-1.269
(3.77)***
-0.008
(0.33)
0.263
(0.92)
-0.013
(0.41)
3750
0.18

0.044
(1.39)
0.041
(2.94)***
0.015
(7.46)***
0.035
(4.17)***
0.006
(1.96)*
-0.362
(12.38)***
0.009
(0.75)
-1.273
(3.80)***
-0.008
(0.33)
0.265
(0.92)
-0.013
(0.41)
3750
0.18

Table 8
Post-IPO Stock Return Performance of CVC Backed and IVC Backed IPOs
The table presents the time-series regressions of post-IPO monthly returns of CVC backed and IVC backed IPO firms using FamaFrenchs three-factor model:

(Rpt Rft) = + (Rmt Rft) + s SMBt + h HMLt + t,

where Rpt is the return on the portfolio of sample firms in month t; Rmt is the return on the index of NYSE, Amex, and NASDAQ stocks in
month t; Rft is the 3-month T-bill yield in month t; SMBt is the return on small firms minus the return on large firms in month t; and HMLt
is the return on high book-to-market stocks minus the return on low book-tomarket stocks in month t. The factor definitions are described
in Fama et al. (1993). The sample period is January 1980 to December 2004, and sample firm returns are included in a particular monthly
portfolio if the firm's IPO occurred within the last 36 months. Panel A presents
Parameter estimates are presented with t-statistics in parentheses.

R2

Panel A: OLS Regressions for Equal Weighted Portfolio of IPO Firms

CVC backed

1.714
(4.03)***

1.331
(13.97)***

1.434
(9.01)***

-1.137
(7.37)***

-0.320
(3.13)***

0.72

IVC backed

0.578
(2.78)***

1.191
(21.76)***

1.254
(15.69)***

-0.594
(7.11)***

-0.322
(4.47)***

0.9

CVC-IVC

1.096
(3.02)***

0.128
(1.85)*

0.171
(1.30)

-0.553
(4.22)***

0.003
(0.04)

0.14

LCVC

0.879
(2.47)**

1.362
(11.94)***

1.294
(10.47)***

-1.039
(7.41)***

-0.314
(3.02)***

0.78

HCVC

1.832
(3.56)***

1.327
(11.70)***

1.389
(6.91)***

-1.171
(6.28)***

-0.331
(2.75)***

0.64

LCVC-HCVC

-0.501
(1.14)

0.089
(0.74)

0.023
(0.13)

0.087
(0.53)

0.045
(0.45)

0.03

Panel A: WLS Regressions for Value Weighted Portfolio of IPO Firms

CVC backed

3.621
(6.68)***

1.382
(11.30)***

1.030
(6.40)***

-1.676
(8.02)***

-0.153
(0.96)

0.71

IVC backed

2.475
(9.62)***

1.283
(16.33)***

0.917
(8.82)***

-0.991
(8.85)***

-0.040
(0.54)

0.84

CVC-IVC

1.102
(2.40)**

0.089
(0.93)

0.106
(0.69)

-0.689
(4.02)***

-0.113
(0.83)

0.14

LCVC

3.007
(5.16)***

1.511
(10.94)***

0.827
(4.96)***

-1.648
(6.62)***

-0.114
(0.64)

0.7

HCVC

3.786
(5.92)***

1.287
(8.30)***

1.173
(6.01)***

-1.646
(6.90)***

-0.126
(0.73)

0.61

LCVC-NCVC

-0.436

0.257

-0.164

0.056

-0.036

0.02

(0.69)

(1.79)*

(0.87)

(0.22)

(0.25)

40