Essays on venture capital

The three essays of this dissertation are to improve our understanding about the investment behavior of venture capital (VC) investors and their role of nurturing new businesses.; In the first essay, I examine the emerging phenomenon of VC-led PIPES (private investments in public equity) and analyze whether and how VCs add value to public firms by comparing a sample of 113 VC-invested PIPES to a control sample of 397 PIPES with hedge funds (HFs). VCs gain substantial ownership, request board seats, and often keep their stake after the PIPES. In contrast, HFs rarely join the board of directors and typically cash out their positions shortly after the PIPE. The stock performance of VC-invested firms is significantly better than HF-invested firms both in the short run and in the long run. Furthermore, I show that the positive valuation effect of having VCs as PIPE investors is a certification effect rather than a monitoring effect.; In the second essay, I find that among newly public firms in the technology sector, VC-backed firms are more likely to be acquired within three years of the IPO than other firms in the late 1990s. I show that the high incidence of double exit among VC-backed IPOs is associated with VCs' institutional attributes. VCs appear to sell their stake more aggressively than initial owners in non-VC-backed firms due to their contractually determined lifetime. When market valuations are low, VCs favor selling their block stake to an acquirer for immediate liquidity and a substantial premium.; In the third essay I investigate VC investors' geographical preference in their choice of portfolio firms. Using a sample of new ventures and VC investors in U.S. between 1980 and 2000, I show that VC investors exhibit strong local bias. Furthermore, VC investors with more syndicate partners, more experience, and more assets under management exhibit stronger local bias. Larger new ventures and new ventures in their later stage are more likely to get funding from distant VC investors. Finally, I find that the distant portfolios outperform the local portfolios because VC investors invest in distant firms with more caution.