Do venture capitalists add value to small manufacturing firms? An empirical analysis of venture...

We examine a set of small, venture capital (VC)-backed manufacturing firms and compare it to a control sample of non VC-backed manufacturing firms going public between 1990 and 1996. We use the degree of underpricing, three-year sales growth, three-year cumulative stock return, and three-year

survivability as measures of success. First, we test if the presence of VC backing results in significant differences in success between the two samples. Next, we test if certain VC and deal characteristics are discriminators within the VC-backed sample of firms. Despite previous literature, which argues for either inferior or superior VC post-initial public offering (IPO) performance, these tests indicate no significant differences between VC- and nonVC-backed firms. Additionally, it is found that VC and deal characteristics are not discriminating factors within the VC sample.

Introduction

In his 1994 survey of the venture capital literature, Barry (1994) suggests a potential future research question: "Do venture capitalists add value within the portfolio firm?" Since the asking of this question, several articles have examined the performance of venture capital (VC)-backed firms versus the performance on nonventure-backed firms (for example, see Brav and Gompers (1997)). In this paper, we extend the literature by further examining Barry's question. Specifically, the authors' extension is on three fronts.

First, efforts are concentrated on small businesses that conduct an initial public offering (IPO) between 1990 and 1996. A small business is defined in accordance with the Small Business Administration standard--a firm with less than 500 employees. Examination of small businesses provides an extreme setting of potential asymmetric information and should represent a setting in which differences between VC-backed and nonVC-backed firms are detectible (if they exist). Megginson and Weiss (1991) argue that VCs provide a certification role to mitigate information asymmetries. By examining only small firms, firms with large degrees of asymmetric information, VC certification should be even more valuable. The analysis of small firms is not trivial, as the preponderance of the empirical evidence used to test VC-related hypotheses is based upon samples that consist mainly of large firms. Ang (1991) argues that small firms are inherently different than larger firms. As such, whether the empirical findings of the large firm empirical tests are robust to small firms is a matter worthy of study.

Second, the focus here is only on manufacturing firms that conduct an IPO. Creating a fairly homogeneous data sample permits the further refinement of comparison between VC- and nonVC-backed firms. Similar to the work of Lerner (1994), who chooses to analyze a particular industry (biotechnology), the authors argue that focusing on a certain subset of firms allows for a cleaner comparison of VC performance.

Third, four dimensions are used to measure success: initial underpricing, stock performance, sales growth, and survivability. Many of the existing studies consider only one of the measures of success in isolation. Using an array of success metrics allows for the addition of completeness to this study of small, manufacturing firms.

The remainder of the paper flows as follows. Next, theories are presented that speak to the expected impact of VC presence in firms going public. One stream of literature suggests that VC-backed firms should have superior performance relative to a control sample, whereas a second line of literature suggests the opposite. The literature that supports both views is discussed. Following the discussion, the data sample and empirical tests are presented. The final section includes a discussion of the empirical results and interpretations of the findings.

Literature Review and Theoretical Camps

Tyebjee and Bruno (1984) outline five specific functions of venture capitalists. In this paper the focus is mainly on their fifth point--the post-investment activities. Tyebjee and Bruno (1984) argue that VCs also serve to originate, to screen, to evaluate, and to structure the deal prior to the post-investment function. The measures of success that are considered all occur after an IPO. These measures may capture the first four functions listed above as well as the post-investment function. This study begins at the point of the IPO, so any benefits offered by VCs prior to the IPO are not addressed. For example, without the assistance of VC funding, mentoring, and monitoring, some of the VC-backed firms never may have made it to the IPO stage. If conducting an IPO is another measure of success, then this study omits this possible measure as a discriminator. Two lines of literature suggest that predictions pertaining to the post-IPO performance of a firm are possible based upon VC versus no VC backing.

The first school of thought claims that VCs do not provide a certification function. Relying on an agency conflict explanation, Admati and Pfleiderer (1994) argue that original insiders may perpetuate an overinvestment problem when dealing with VC investors. Specifically, insiders may continue to invest in projects with significant probabilities of destroying value, if the insiders are using other people's money. Relying on asymmetric information, the original insiders can attract VC capital (that is, other people's money). By the time VCs learn of the problem, they now have become insiders themselves. As new insiders, VCs now have incentives to spend other people's money and hence may look toward an IPO for new funds. Initial public offering investors, due to asymmetric information, may on average invest in inferior IPOs when they are VC backed. The empirical prediction from this information/agency framework is that VC-backed IPOs should underperform nonVC-backed IPOs.

Amit, Glosten, and Muller (1990) provide another argument that VC-backed firms should fair worse in aftermarket performance measures. They reason that VCs attract lemons on average because strong entrepreneurial firms will be able to come to market without being forced to sell an equity interest to VCs. VC-backed IPOs are suspected to be inferior to nonVC-backed IPOs based on this logic.

Gompers (1996) argues that a certain subset of VCs--young VCs trying to establish reputations--have perverse incentives to bring IPOs to market prematurely. He provides empirical evidence of this hypothesis. The evidence suggests that young VCs act in their own self-interest relative to old VCs and do not optimize the value of the IPO through such functions as monitoring and timing the IPO market.

The second school of thought claims that VCs do provide a certification function for firms going public. Megginson and Weiss (1991) and Barry et al. (1990) are two of the early studies that analyze VC effects on IPO firms and find that VC-backed firms underprice to a lower degree than nonVC-backed IPOs. Both studies conclude that VCs serve a certification function and mitigate information asymmetries between the issuing firm and IPO investors.

Brav and Gompers (1997) test the long-run performance of VC- and nonVC-backed IPOs. Using equally weighted returns, they find that VC-backed firms significantly outperform nonVC-backed firms. However, using value weighting and the Fama and French (1993) three-factor model, they find that only small, nonVC-backed IPOs underperform. Because small VC-backed IPOs do not underperform based upon Brav and Gomper's results, one can infer that for small firms (defined using market capitalization), VC-backed IPOs should outperform nonVC-backed IPOs in the aftermarket.

Thus, these two streams of research are at odds. One claims that VC-backed firms should underperform in the aftermarket; the other asserts that VC-backed firms should overperform in the aftermarket. In the next section, these two predictions are tested empirically. A VC-backed IPO sample and a control sample of nonVC-backed IPOs are constructed. The testable hypotheses are as follows:

H1: Relative to nonVC-backed IPOs, VC-backed IPOs will have greater underpricing, lower three-year cumulative stock returns, lower three-year growth in sales, and a lower survivability rate.

H2: Relative to nonVC-backed IPOs, VC-backed IPOs will have lower underpricing, greater three-year cumulative stock returns, greater three-year growth in sales, and a greater survivability rate.

Data Sample: Selection Criteria and Summary Statistics

The VC-backed IPO sample is drawn from Security Data Company's (SDC) new issues database. The screening criteria and the number of SDC firms meeting each successive criterion are as follows: (1) The firm conducted an IPO between January 1, 1990, and December 31, 1996 (n = 4,138); (2) The firm must have been venture backed (n = 1,296); (3) The firm must have fewer than 500 employees reported in the offering prospectus (n = 284); and (4) The firm is classified as a manufacturing company by SDC (n = 142). From these 142 firms, it is required that a firm list on the Center for Research in Security Prices (CRSP) database in order to retrieve the stock return data and delisting codes if applicable. Fourteen firms that do not list on CRSP are lost, and two firms that have extreme stock returns are deleted, for a final sample of 126 VC-backed IPOs.

The control sample also is drawn from SDC's new issues database. The screening criteria for the control sample are that the firm (1) conducted an IPO between January 1, 1990, and December 31, 1996 (n = 4,138); (2) must not have been venture backed (n = 2,842); (3) must have fewer than 500 employees reported in the offering prospectus (n = 368); and (4) is classified as a manufacturing company by SDC (n = 137). From these 137 firms, 92 have available stock market data from CRSP. The sample selection criteria suggest that if listing on CRSP is a measure of success, VC-backed firms are successful 90 percent of the time (128/142), whereas nonVC-backed firms are successful only 67 percent of the time (92/137). In an attempt to create a control sample with an equal number of observations as the VC sample, Bloomberg was searched for pricing data on the 45 firms lost due to the CRSP screen. With the Bloomberg supplement, the control sample consists of 108 nonVC-backed IPOs with returns data.

The summary statistics for both samples are presented in Table 1, with Panel A containing the VC-backed IPO data and Panel B containing the nonVC-backed IPO data. The offer price, number of primary shares, number of secondary shares, lead underwriter, number of employees at the offer date, total assets before the offer, book value per share prior to the offer, standard industrial code (SIC) code, and inside ownership prior to and after the offer from SDC are retrieved. To define the high-tech indicator variable, we use the SIC codes identified by Field and Hanka (2001), who also use SDC data. For manufacturing firms, these codes are 357, 367, 369, 382, and 384. Total shares outstanding, first day closing price, and the monthly returns used in the calculation of the three-year holding period return are from CRSP. Sales data are from Compustat. The Carter-Manaster underwriter metric is taken from Carter and Manaster (1990).

Panel A indicates that the average VC-backed IPO issues 2,135,169 primary shares and 246,427 secondary shares at an offer price of $10.42, representing a float of 31 percent of the firm. The VC sample has an average of 164 employees and total assets prior to the offer of nearly $76 million per firm. Prior to the offer, managers own an average 50.5 percent of the firm. After the offer, managers own an average of 36 percent. VC-backed IPOs have an average underpricing of 10 percent, defined as the first day closing price minus the offer price, all divided by the offer price. The 10 percent underpricing may seem low based upon the size of the firms in the sample (that is, smaller firms have been shown to underprice to greater degrees). As a comparison, taking an equally weighted average of all IPOs that went public between 1990 and 1996 from Jay Ritter's website (http://bear.cba.ufl.edu/ritter/ index.html) results in a 15.7 percent initial return. Perhaps the firms in this sample, though small, have lower underpricing because they are all manufacturing firms. The average firm experienced a three-year cumulative return of 26.7 percent on a three-year sales growth of 64.2 percent. Panel B reports the same statistics for the control sample. A detailed examination of Panel B will be left to the reader.

Univariate Analysis: Venture Capital versus Nonventure Capital

Table 2 presents the first series of tests. Panels A-C test the nature of the VC firms versus the control sample--Do the firms themselves vary in significant manners? Panel D tests three of the four success measures, initial underpricing, sales growth, and stock return. The t-statistic and p-value reported for each variable is for the parametric t-test of difference in means, with the null hypothesis of equal means between groups. Panel A indicates that VC-backed IPOs have larger offer prices by $2.32 (p < 0.0001); float an average of seven percent less of the firm (p = 0.0042); and use more prestigious underwriters (p < 0.0001). Panel B indicates that 12 percent more of the VC-backed IPOs are in the high-technology industry (p = 0.0455) and have an average of two million more shares outstanding after the offer.

Panel C reports ownership characteristics. SDC defines the variable Inside Ownership Prior to [after] Offer as "percentage of shares held by insiders (management shares only) before [after] offer." VC-backed IPO managers have significantly less ownership relative to the control sample both before and after the offer. Prior to the offer, VC-backed IPO managers have 17 percent less ownership (p < 0.0001) and after the offer, nine percent less (p = 0.0001). Managers sell four percent more of their personal shares in VC-backed offerings (p = 0.0029) and insiders in general sell three percent more (that is, secondary shares) in VC-backed offers (p = 0.0950). Given the agency arguments of Jensen and Meckling (1976), ceteris paribus, the greater separation of managers and owners in the VC-backed IPOs would predict worse performance for VC-backed IPOs. However, the monitoring and consulting effects of VCs may counter the greater separation of ownership alignment.

Panel D reports the univariate test results of H1 and H2. If either hypothesis holds, significant differences in means should he observed. Panel D indicates that none of the success measures (that is, initial underpricing, three-year sales growth, or three-year return) has significantly different means between samples. This finding of nonsignificance is surprising considering the previous section, in which prior literature was discussed that argues for either superiority or inferiority of VC-backed IPOs. The preliminary univariate tests indicate that there is no significance difference between VC-and nonVC-backed IPOs and as such suggests the VCs do not add value in the post-IPO period.

Multivariate Analysis: Venture Capital versus Nonventure Capital

The previous univariate results indicate no significant difference between the VC and control samples for underpricing, sales growth, or stock returns. In this section, three ordinary least-squares models are estimated using these three success measures as dependant variables. The general model estimated is as follows:

(1) Success [variable.sub.i]

= [[alpha].sub.i] + [beta]V[C.sub.i] + [gamma][C.sub.i] + [[epsilon].sub.i]

where

Success variable in Model 1 is underpricing, in Model 2 is three-year sales growth, and in Model 3 is three-year stock return;

i represents an individual IPO firm;

[alpha] is the intercept of the model;

[beta] is the coefficient on VC, a variable that equals one when an IPO is VC backed and zero otherwise;

[gamma] is a vector of coefficients;

C is a vector of control variables; and

[epsilon] is a random error term.

The specific control variables include size of the firm (natural log of assets and number of employees) to control for size effects; flotation size of the offer to control for Leland and Pyle (1977) type signaling; market to book equity ratio to control for growth opportunities; high-tech dummy variable to control for high-tech effects; and the Carter-Manaster underwriter measure to control for underwriter effects.

Table 3 reports the results of the regressions. The variable of interest in each of the models is the venture capital dummy variable. H1 and H2 predict that this variable should have either a positive or negative, significant sign. In all models, the coefficient for the VC-backed indicator is statistically equal to zero. That is, the presence of a VC does not impact the degree of underpricing, the three-year sales growth, or the three-year stock return. The conclusions from the multivariate analysis support those from the univariate tests.

Survivability: A Fourth Measure of Success?

Here, the survivability of an IPO is examined as a potential measure of success. The delisting data is taken from CRSP. Panel A of Table 4 presents the CRSP delisting code, along with each firm name that delisted, an indicator variable that equals "yes" for VC-backed IPOs and "no" otherwise and the reason for delisting. The reason column is an abbreviated form of the CRSP definition for each delisting code. If a firm delists through acquisition, depending on the transaction arrangements, the acquisition may be a positive outcome. On the other hand, if a firm delists because it can no longer meet exchange listing requirements, this is a negative outcome.

Panel B reports the means and difference tests for the VC and control sample. Twelve percent of the control sample delists in the three-year period following the IPO, but only approximately eight percent of the VC-backed IPOs delist. The difference is not statistically significant (p = 0.2726) at conventional levels. If the samples are compared by their CRSP Delist Code with all first digit 2s (acquisitions) and all first digit 5s (listing failures), 44 percent of the control sample is delisted for acquisition purposes (7/16), whereas 60 percent of the VC sample is acquired (6/10). Statistically, the 16-percent difference is not significant.

Moving beyond Venture Capital versus Nonventure Capital: Venture Capital Firm Characteristics

Thus far these results suggest that in a simple comparison of VC- versus nonVC-backed small manufacturing IPOs, there is no statistically significant difference between the two in any of the four measures of success. Perhaps it is not the presence of a VC but instead a certain type of VC firm or a certain structure of the VC deal that matters in the post-IPO performance of small manufacturing firms. For example, Gompers (1996) shows that it is young VCs that act in their own interest--not experienced VCs. In this section, measures designed to capture the various characteristics of the VC firms involved in each IPO and details pertaining to the deal itself (for example, number of rounds and total VC capital invested) are constructed. The summary statistics for these variables are presented in Table 5.

The average firm has had five and one-half years of VC financing before going public with a total VC investment of over $17 million. The average IPO has a two-year gap between the final pre-IPO VC round and the IPO date. The sample has an average of 4.3 VC financing rounds prior to the IPO and 0.97 rounds after the IPO. On average, 4.4 VC are present in each round preceding the IPO and 27 percent (45 percent) of the time a "Big Three" ("Big Nine") VC participates in a round. Big Three and Big Nine are proxies to capture the ability of each VC, constructed by summing the total number of rounds each VC participated in for the sample of firms. Table 6 reports the top 50 VCs based upon ranking. Kleiner, Perkins, Caufield & Byers is the top-ranked firm participating in 72 rounds, with Burr, Egan, Deleage & Co. next with 64 rounds, and New Enterprise Associates third with 61 rounds. To be included in the Big Nine, a firm had to have participated in at least 30 rounds.

In unreported tests, Pearson Correlations are computed, and a series of ordinary least-squares regressions are examined to determine the impact of the venture capital characteristics. In none of these tests are modified versions of H1 or H2 supported based upon VC or deal characteristics. Additionally, robustness tests are performed without deleting the outliers, winsorizing the outliers, excluding the Bloomberg supplemental data, adjusting returns with the CRSP equal and value weighted indices, using a logit model for survivability, testing for differences in medians using a Wilcoxon rank sign test, and using the White (1980) heteroskedasticity correction. The conclusions are robust to all of these tests no--significant differences can be documented in initial underpricing, sales growth, stock returns, or survivability between VC and nonVC-backed IPOs or between different types of VCs or between different types of deal characteristics.

Conclusion

Four measures of post-IPO performance have been examined for a sample of small, manufacturing IPOs. Two hypotheses are advanced that predict either inferior or superior performance of VCs relative to nonVC IPOs. In both univariate and multivariate tests, no evidence for either hypothesis is found. VC and nonVC IPOs are not statistically distinguishable through three years after the offer date.

Once the authors conclude that the presence or lack thereof of a VC is not a discriminating factor in the post-IPO performance of the sample firms, the authors test to determine if certain types of VCs make a difference. Proxies are created to measure the ability and presence of the VC, and tests are administered to determine whether some VCs do better than others or whether the top VC-backed IPO firms outperform the control sample. The tests indicate that no statistical differences exist across any of the various factors.

It can be concluded that there is no meaningful difference between the initial underpricing, three-year sales growth, three-year cumulative stock return, or three-year survivability between VC and nonVC-backed IPOs. While this paper addresses the post-IPO performance, the authors are not able to comment on the value VCs add in bringing the firms public. If the VC-backed firms would have never been able to go public without the aid of the VCs, then just the fact that the company completed an IPO may he an indicator of success.

Table 1 (Panel A)
Summary Statistics for Venture Capital-Backed IPOs, 1990-1996

Panel A. Venture Capital-Backed IPOs             Standard
Variable
                                      n      Mean         Deviation

Offering Characteristics
  Offer price ($ US)                 126         10.42         3.31
  Number of primary shares           126  2,135,169       830,145
  Number of secondary shares         126    246,427       648,466
  Flotation of the issue (percent)   125         31.0          13.0
  Carter-Manaster
    underwriter measure              126          7.32          2.62
Firm Characteristics
  Number of employees at offer date  126        164           129
  Total assets before
    the offer ($ mil US)             121         76.0         652.9
  Book value per share ($ US)        116          3.54          2.45
  Market equity
    to book equity ratio             115          7.25         25.53
  High-tech indicator variable       126          0.45          0.5
  Total shares outstanding           126  8,893,437      5,674,010
Ownership characteristics
  Inside ownership prior
    to offer (percent)               102         50.53          23.24
  Insider ownership after
    offer (percent)                  101         36.17          16.73
Post-IPO Measures
  First day closing price ($ US)     126         11.63           5.1
  Initial return                     126          0.1            0.18
  1 year sales ($ mil US)            121         30.65          54.49
  2 year cumulative
    sales ($ mil US)                 117         69.4          120.7
  3 year cumulative
    sales ($ mil US)                 110        107.4          191.4
  3 year sales growth                107          0.642          1.512
  Cumulative 3 year return           126          0.257          1.198

Panel A. Venture Capital-Backed IPOs          Standard
Variable
                                        Minimum        Maximum

Offering Characteristics
  Offer price ($ US)                       4               25
  Number of primary shares                 0         7,500,000
  Number of secondary shares               0         4,960,000
  Flotation of the issue (percent)        10.0             100.0
  Carter-Manaster
    underwriter measure                    0                 9
Firm Characteristics
  Number of employees at offer date        6               500
  Total assets before
    the offer ($ mil US)                   0.4           7,190
  Book value per share ($ US)              0.07             14.67
  Market equity
    to book equity ratio                   0               259.36
  High-tech indicator variable             0                 1
  Total shares outstanding           253,000        47,803,000
Ownership characteristics
  Inside ownership prior
    to offer (percent)                     4.3              96.5
  Insider ownership after
    offer (percent)                        2.64             75.7
Post-IPO Measures
  First day closing price ($ US)           4.125            45.13
  Initial return                          -0.16              0.97
  1 year sales ($ mil US)                  0               420.13
  2 year cumulative
    sales ($ mil US)                       0               934.9
  3 year cumulative
    sales ($ mil US)                       0             1,450
  3 year sales growth                     -0.96              9.36
  Cumulative 3 year return                -0.99              5.16

Table 1 (Panel B)
Summary Statistics for Nonventure Capital-Backed IPOs, 1990-1996

Panel B. Nonventure                                  Standard
Capital-Backed IPOs
Variable                            n        Mean          Deviation

Offering Characteristics
  Offer price ($ US)               133           8.1              4.16
  Number of primary shares         133   2,031,137        1,487,302
  Number of secondary shares       133     187,567          627,684
  Flotation of the issue
    (percent)                       90           0.38             0.205
  Carter-Manaster underwriter
    measure                        133           3.79             3.72
Firm Characteristics
  Number of employees at offer
    date                           133         163              143
  Total assets before the offer
    ($ mil US)                     111          29.5            108.23
  Book value per share ($ US)      124           3.48             4.99
  Market equity to book equity
    ratio                          110           3.94             2.67
  High-tech indicator variable     133           0.33             0.47
  Total shares outstanding          90   6,877,756        5,250,542
Ownership Characteristics
  Inside ownership prior to
    offer (percent)                111          67.89            27.67
  Insider ownership after offer
    (percent)                      111          45.53            19.32
Post-IPO Measures
  First day closing price ($ US)   113           9.61             5.06
  Initial return                   113           0.13             0.23
  1 year sales ($ mil US)          105          48.15            96.44
  2 year cumulative sales
    ($ mil US)                     101          94.45           140.19
  3 year cumulative sales
    ($ mil US)                      89         139.8            202.7
  3 year sales growth               84           0.835            1.594
  Cumulative 3 year return         108           0.123            1.049

Panel B. Nonventure                                Standard
Capital-Backed IPOs
Variable                                    Minimum         Maximum

Offering Characteristics
  Offer price ($ US)                             1               21
  Number of primary shares                 300,000        8,850,000
  Number of secondary shares                     0        5,916,055
  Flotation of the issue
    (percent)                                    0.151            1
  Carter-Manaster underwriter
    measure                                      0                9
Firm Characteristics
  Number of employees at offer
    date                                         1              500
  Total assets before the offer
    ($ mil US)                                   0.3            882.4
  Book value per share ($ US)                   -0.77            43.5
  Market equity to book equity
    ratio                                        1.21            19.58
  High-tech indicator variable                   0                1
  Total shares outstanding               1,400,000       30,862,000
Ownership Characteristics
  Inside ownership prior to
    offer (percent)                              1.6            100
  Insider ownership after offer
    (percent)                                    1.2             82.4
Post-IPO Measures
  First day closing price ($ US)                 1.38            32.125
  Initial return                                -0.34             1.18
  1 year sales ($ mil US)                        0              785.15
  2 year cumulative sales
    ($ mil US)                                   0              720.75
  3 year cumulative sales
    ($ mil US)                                   0            1,081.7
  3 year sales growth                           -1                9.365
  Cumulative 3 year return                      -1                4.25

Table 2
Difference Tests for Venture Capital versus Nonventure
Capital-Backed IPOs

Variable                                      VC-Control    t-statistic

Panel A. Offering Characteristics

  Offer price                                        2.32          4.98
  Number of primary shares                     104,000             0.7
  Number of secondary shares                    58,860             0.74
  Flotation of the issue                            -0.07         -2.91
  Carter-Manaster underwriter measure                3.53          8.87

Panel B. Firm Characteristics

  Number of employees at offer date                  1.72          0.1
  Total assets (millions) before the offer          46.49          0.77
  Book value per share                               0.06          0.12
  Market equity to book equity ratio                 3.31          1.38
  Hi technology firms                                0.12          2.01
  Total shares outstanding                   2,020,000             2.69

Panel C. Ownership Characteristics

  Inside ownership prior to offer                  -17.36         -4.97
  Insider ownership after offer                     -9.36         -3.78
  Change in insider ownership                        0.04          3.02
  Percent of secondary to total shares               0.03          1.68
    offered

Panel D. Post-IPO Measures

  First day closing price                            2.02          3.07
  Initial return                                    -0.03         -1.26
  1 year sales                                     -17.5          -1.65
  2 year cumulative sales                          -25.0          -1.4
  3 year cumulative sales                          -32.39         -1.15
  3 years sales growth                              -0.19         -0.85
  Cumulative 3 year return                           0.14          0.92

Variable                                     p-value *

Panel A. Offering Characteristics

  Offer price                                  <0.0001
  Number of primary shares                      0.4848
  Number of secondary shares                    0.4590
  Flotation of the issue                        0.0042
  Carter-Manaster underwriter measure          <0.0001

Panel B. Firm Characteristics

  Number of employees at offer date             0.9191
  Total assets (millions) before the offer      0.4417
  Book value per share                          0.9022
  Market equity to book equity ratio            0.1698
  Hi technology firms                           0.0455
  Total shares outstanding                      0.0078

Panel C. Ownership Characteristics

  Inside ownership prior to offer              <0.0001
  Insider ownership after offer                 0.0002
  Change in insider ownership                   0.0029
  Percent of secondary to total shares          0.0950
    offered

Panel D. Post-IPO Measures

  First day closing price                       0.0024
  Initial return                                0.2094
  1 year sales                                  0.1019
  2 year cumulative sales                       0.1624
  3 year cumulative sales                       0.2521
  3 years sales growth                          0.3957
  Cumulative 3 year return                      0.3605

* VC-Control is the difference between the VC and the nonVC samples.
The t-statistic and p-value is for the parametric difference in means
test.

Table 3
Ordinary Least Squares Models of Success Proxies for Venture and
Nonventure-Backed IPOs, 1990-1996

Dependent              Model 1                Model 2
variable =          Initial Return      3 year sales growth

                  Coefficient     t     Coefficient     t

Intercept          0.2344 ***    4.39    1.1809 ***    2.73

Venture capital
 dummy variable   -0.0288       -0.77    0.0695        0.23

Natural log of
 assets prior
 to offer          0.0061        0.45   -0.0573       -0.57
Number of
 employees at
 IPO date          0.0001        1.02   -0.0017 *     -1.72
Size of
 flotation of
 offer            -0.1919 *     -1.76   -0.4799       -0.54
Market to book
 ratio            -0.0003       -0.34   -0.0033       -0.63
High-tech dummy
 variable          0.0866 ***    2.71   -0.0956       -0.38
Carter-Manaster
 underwriter
 metric           -0.0172 ***   -3.31    0.0067        0.16

Adjusted
 [R sub 2]         0.1005               -0.0044
F value            3.9 ***               0.91

Dependent               Model 3
variable =        3 year stock return

                  Coefficient     t

Intercept           -0.1677     -0.61

Venture capital
 dummy variable     -0.0358     -0.19

Natural log of
 assets prior
 to offer            0.0083      0.12
Number of
 employees at
 IPO date            0.0020 *    2.85
Size of
 flotation of
 offer              -0.2510     -0.44
Market to book
 ratio              -0.0019     -0.49
High-tech dummy
 variable           -0.0197     -0.12
Carter-Manaster
 underwriter
 metric              0.0224      0.83

Adjusted
 [R sub 2]           0.0286
F value              0.10

*, **, and *** represent statistical significance at the 10-, 5-, and
1-percent levels, respectively.

Table 4

Delisting Firms, Reasons for Delisting, and Difference Test
for Venture and Nonventure-Backed IPOs, 1990-1996

Panel A. Delisting Firms and Reasons for Delisting

                                       CRSP
                                      Delist
Company Name                    VC     Code     Reason for Delisting

Soricon Corp                    no     242     ACQUIRED IN MERGER
Orthopedic Technology Inc       no     200     ACQUIRED IN MERGER
Embryo Development Corp         no     561     INSUFFICIENT FLOAT
                                               OR ASSETS
LBMS                            no     203     ACQUIRED IN MERGER
SC & T International Inc        no     580     DELINGUENT, NONPAYMENT
                                               FEES
Arterial Vascular Engineering   no     201     ACQUIRED IN MERGER
Autonomous Technologies Corp    no     241     ACQUIRED IN MERGER
Berg Electronics Corp           no     200     ACQUIRED IN MERGER
Compare Generiks Inc            no     552     PRICE BELOW MINIMUM
                                               LEVEL
Helisys Inc                     no     561     INSUFFICIENT FLOAT
                                               OR ASSETS
Katz Digital Technologies Inc   no     200     ACQUIRED IN MERGER
Accent Color Sciences Inc       no     561     INSUFFICIENT FLOAT
                                               OR ASSETS
Cragar Industries Inc           no     560     INSUFFICIENT CAPITAL
Enamelon Inc                    no     560     INSUFFICIENT CAPITAL
Room Plus Inc                   no     552     PRICE BELOW MINIMUM
                                               LEVEL
Tellurian Inc                   no     582     PRICE BELOW MINIMUM
                                               LEVEL
Triconex Corp                   yes    200     ACQUIRED IN MERGER
Winston Furniture Co Inc        yes    203     ACQUIRED IN MERGER
Biofield Corp                   yes    561     INSUFFICIENT FLOAT
                                               OR ASSETS
Imagyn Medical Inc              yes    203     ACQUIRED IN MERGER
Lion Brewery Inc                yes    200     ACQUIRED IN MERGER
Technology Service Group Inc    yes    203     ACQUIRED IN MERGER
Ultrafem Inc                    yes    580     DELINGUENT, NONPAYMENT
                                               FEES
Image Guided Technologies Inc   yes    561     INSUFFICIENT FLOAT
                                               OR ASSETS
Laminating Technologies Inc     yes    552     PRICE BELOW MINIMUM
                                               LEVEL
SeaMED Corp                     yes    231     ACQUIRED IN MERGER

Panel B. Difference Test

                                          Sample
                                           size     Mean    p-value

Control sample delisting dummy variable    133     0.1203
VC sample delisting dummy variable         126     0.0794
Difference                                         0.0409   0.2726

Table 5 Characteristics of Venture Capital Firms and Deals, 1990-1996

Variable                             n        Mean       Std Dev

Months between first and last       110         64.03       49.6
  round of VC financing
Months between first round          110         66.25       40.27
  of VC financing and the IPO
Months between round before         110         27.02       31.58
  the IPO and the IPO
Months between IPO and last         110         16.65       27.3
  round of VC financing after
  IPO
Number of VC rounds of              110          4.33        2.59
  financing before the IPO
Number of VC rounds of              110          0.97        1.34
  financing after the IPO
Total number of VC financing        110          5.29        2.84
  rounds
Average number of investors         110          4.4         5.28
  in each round preceding
  the IPO
Average number of investors         110          4.18        5.27
  in all rounds
Presence of a top three VC          110          0.27        0.45
  firm (indicator variable)
Presence of a top nine VC           110          0.45        0.5
  firm prior to IPO (indicator
  variable)
Presence of a top nine VC           110          0.15        0.35
  firm after the IPO (indicator
  variable)
Indicator variable for VC           110          0.47        0.5
  funding after the IPO
Total known amount of VC            105     17,169      14,093
  financing invested
  ($ thousand US)

Variable                          Minimum    Maximum

Months between first and last        0          291
  round of VC financing
Months between first round           0          199
  of VC financing and the IPO
Months between round before          0          135
  the IPO and the IPO
Months between IPO and last          0          155
  round of VC financing after
  IPO
Number of VC rounds of               0           13
  financing before the IPO
Number of VC rounds of               0            5
  financing after the IPO
Total number of VC financing         1           16
  rounds
Average number of investors          0           48
  in each round preceding
  the IPO
Average number of investors          1           48
  in all rounds
Presence of a top three VC           0            1
  firm (indicator variable)
Presence of a top nine VC            0            1
  firm prior to IPO (indicator
  variable)
Presence of a top nine VC            0            1
  firm after the IPO (indicator
  variable)
Indicator variable for VC            0            1
  funding after the IPO
Total known amount of VC            23       66,748
  financing invested
  ($ thousand US)

Table 6
Venture Capital Firms and Number of Participating
Rounds, 1990-1996

                                                              Number of
Venture Capital Firm Name                                      Rounds

Kleiner Perkins Caufield & Byers                                 72
Burr, Egan, Deleage & Co.                                        64
New Enterprise Associates                                        61
Domain Associates, L.L.C.                                        42
Lightspeed Venture Partners (FKA: Weiss, Peck & Greer)           37
Oak Investment Partners                                          37
Sequoia Capital                                                  35
Venrock Associates                                               35
Chase H&Q (FKA Hambrecht & Quist)                                30
Ticonderoga Capital, Inc. (FKA: Dillon Read Venture Capital)     25
Whitney & Co. (FKA: J.H. Whitney & Co.)                          25
Individuals                                                      24
Institutional Venture Partners                                   24
Accel Partners                                                   22
Pathfinder Venture Capital Funds                                 20
Columbine Venture Funds, The                                     19
InterWest Partners                                               19
Bryan & Edwards                                                  17
MBW Management, Inc.                                             16
Sevin Rosen Management Co.                                       16
Technology Venture Investors                                     16
CORAL Ventures                                                   15
Delphi Ventures                                                  15
Sprout Group                                                     15
Warburg, Pincus & Co., LLC. (FKA: E.M. Warburg, Pincus & Co)     15
Technology Funding                                               14
Vision Capital Management (FKA Glenwood Capital)                 14
Abingworth Venture Management Limited                            13
Marquette Venture Partners                                       13
Morgenthaler Ventures                                            13
Sutter Hill Ventures                                             13
Asset Management Associates, Inc.                                12
Oxford Partners                                                  12
Patricof & Co. Ventures, Inc.                                    12
Robertson Stephens & Company, LLC                                12
U.S. Venture Partners                                            12
Venture Capital Fund of New England, The                         12
Vista Group, The                                                 12
Adler & Co.                                                      11
AVI Capital, L.P.                                                11
Cardinal Partners (FKA: DSV Ventures)                            11
Chatham Venture Corp.                                            11
CW Group, Inc.                                                   11
Hambro International Equity                                      11
Nazem & Co.                                                      11
Bass Associates                                                  10
Brentwood Associates Private Equity                              10
Norwest Venture Partners                                         10
Sofinnova Ventures                                               10
Walden International Investment Group (AKA: Walden Group)        10

The authors express thanks to participants of the 2001 Babson College-Kauffman Foundation Entrepreneurship Research Conference.

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Jim Brau is assistant professor of finance and Goldman Sachs Fellow at the Marriott School at Brigham Young University. His current research interests include initial public offerings and entrepreneurial finance.

Richard Brown worked on this paper as an undergraduate as part of his scholarship from the Office of Research and Creative Activities (ORCA) at Brigham Young University, 2000-2001. He currently works in New York City as a financial analyst.

Jerry Osteryoung is Jim Moran Professor of Entrepreneurship, is executive director of the Jim Moran Institute of Global Entrepreneurship, and has served as a professor of finance at Florida State University for over 30 years. His current research interests include entrepreneurial finance, business growth cycles, and firm valuation.