How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface

Abstract

The research program of the Center for Economic Studies (CES) produces a wide range of theoretical and empirical economic analyses that serve to improve the statistical programs of the U.S. Bureau of the Census. Many of these analyses take the form of CES research papers. The papers are intended to make the results of CES research available to economists and other interested parties in order to encourage discussion and obtain suggestions for revision before publication. The papers are unofficial and have not undergone the review accorded official Census Bureau publications.The opinions and conclusions expressed in the papers are those of the authors and do not necessarily represent those of the U.S. Bureau of the Census. Republication in whole or part must be cleared with the authors.

What Matters in Venture Capital? Evidence from Entrepreneurs’ Stated Preferences

“…Using a matching model, Sorensen (2007) demonstrates that the greater success rates of VCs with better track records are due, in part, to their ability to select companies of higher preinvestment quality and to their superior provision of value‐adding services. Chemmanur, Krishnan, and Nandy (2009) study interim company performance using Census data and, consistent with Sorensen (2007), establish that companies backed by more experienced VCs demonstrate improvement in product market performance as well as reductions in various input costs.…”

“…The correlation between Number of Rankings per User and VC IPO Fraction in our sample is 0.10 and is statistically significant 10 . We know from Sorensen (2007) and Chemmanur, Krishnan, and Nandy (2009) that entrepreneurial companies of higher quality connect with more reputable VCs. Therefore, entrepreneurs who rank more VCs are likely to be the high quality ones, and are unlikely to be unhappy complainers.…”

“…To understand this finding, which at first glance may be surprising, one needs to consider the nature of the bargaining game between VC and entrepreneur. The superior value‐adding abilities of VCs with better track records (Sorensen, 2007; Chemmanur, Krishnan, and Nandy, 2009) mean that such investors offer a scarce resource which is demanded by entrepreneurs. As expected in a competitive bargaining game, VCs with better track records adjust the deal pricing (pre‐money valuations) so that they extract most of the surplus they create (Hsu, 2004).…”

The Impact of Venture Capital Investment on the Performance of Peer‐to‐Peer Lending Platforms: Evidence from China

“…In addition to demonstrating the selection effect of VCs, that is, VCs are able to ex ante select and finance entrepreneurial firms with high growth potential, extensive studies have documented the governance effect of VCs, that is, VCs add value to entrepreneurial firms through ex post governance and help them outperform non‐VC‐backed firms (Chemmanur et al ., ; Guo and Jiang, ). The introduction and presence of VCs is heavily discussed in corporate finance while little attention has been paid to their effect on the governance and performance of P2P platforms, either in the Chinese market or in other markets.…”

“…Examples of VCs’ impact on performance include Hellmann and Puri (), Kortum and Lerner (), Hellmann and Puri (), Chemmanur et al . (), and Guo and Jiang (). This category of literature has documented that VC‐backed firms outperform non‐VC‐backed firms due to the ex ante selection effect or/and the ex post governance effect.…”