Venture Capital and Firm Performance Over the Long-Run: Evidence from High-Tech IPOs in the United States

Abstract

Despite widespread interest in the key role that venture capital plays in financing young, high-tech firms, little is known about the relative performance of venture-backed firms over the long-run. Using data from the U.S. high-tech sector, this paper examines the performance and financing of venture-and non-venture-backed firms during the decade following their IPO. Venture-backed firms survive longer, grow faster, are more R&D intensive, have generally superior operating performance, raise more external equity, and have a greater cumulative impact on the U.S. high-tech sector. These findings suggest that the true legacy of venture capital finance extends well beyond the IPO. Introduction Firms that relied on venture capital for their early-stage, private financing have had an unmistakable impact on economic activity and now dominate many of the most innovative and dynamic industries in the U.S. economy. Between 1975 and 2003 more than 2,400 venture-backed firms undertook an initial public offering, and approximately 60% of these firms were located in seven key high-tech industries. 1 At the end of 2003 venture-backed firms accounted for over 20% of the publicly traded firms in the U.S., represented over 25% of the market value of publicly traded firms, and were responsible for more than 12% of sales. In the high-tech sector venture-backed firms have had an even more dramatic effect—in 2003 venture-backed