The Effect Of Venture Capital On Ventures

Venture capital provides not only financial support but also managerial advice and valueadding service(Bottazzi,Rin and Hellmann,2008;Hellmann and Puri,2000).Existing literature shows that firms receiving venture capital achieve significantly higher employment growth rates(Bertoni,Colombo and Grilli,2011)and patent than those that receive no venture capital at all.However,some young venture capitalists may take companies public prematurely in order to establish reputations and improve their future fund raising(Gompers,1996;Hsu,2013).The incentives to meet listing standards may drive VCs to use their influences over management to manipulate the portfolio firm's accounting and growth decisions,which will result in long-run underperformance.Foreign venture capital provides access to complementary knowledge,international networks and management skills into emerging markets.Meanwhile,domestic venture capital,with geographic proximity to investment targets,has a better knowledge of local market conditions and provides better access to local resources.It is natural to ask whether there are systematic differences in innovation between foreign venture capital-backed firms and domestic venture capital-backed firms and which is better to nurture innovation.Answering them is very important since identifying the underlying mechanisms will help firms properly select venture capital that could better motivate and foster innovation.The valuation of VC-backed firms determines cost of capital for entrepreneurs(i.e.,the ownership stake they give up)and ultimate return for venture capitalists,which is therefore vitally important to both sides.In view of the above problems,our paper focuses on the following issues.First,what's the effect of pre-IPO growth on the post-IPO long-run performance is positive? or negative? Focusing on VC-backed firms,how is the relationship? What is the possible underlying reason for the relationship? Second,which one between foreign venture capital and domestic venture capital is better in nurturing innovation? Is it due to a treatment effect or a selection effect? What is the possible underlying economic mechanisms? Third,what's the relationship between investor attention to industries and firm valuations? Is the relationship an attention-induced result or an information-based fundamental premium? What's the possible approaches to attenuate the overpricing?Based on the empirical research,the main conclusions of this thesis are as follows:First,we explore the effect of pre-IPO growth on post-IPO long-run performance for VCbacked firms in the Chinese A-share market.We find the effect of pre-IPO growth on the longrun performance after IPO is positive and linear,but is attenuated by venture capital in our matched sample.When we focus on VC-backed firms,we find an inverted-U relationship between pre-IPO growth and post-IPO long-run performance,which does not hold in the matched sample.We then explore why post-IPO long-run performance exhibits a reversal when pre-IPO growth is above the saturation point and find that some opportunistic VCs may drive portfolio firms to engage in accounting fraud,impeding the post-IPO long-run performance.Our paper provides the first empirical study to explore the influence of pre-IPO growth on postIPO long-run stock performance for VC-backed IPO firms.Second,our paper analyzes how foreign venture capital differ from domestic venture capital in fostering innovation for VC-backed IPOs in the Chinese market.We find that foreign venture capital-backed IPOs are less innovative compared with domestic venture capitalbacked IPOs.In addition,we adopt the propensity score matching procedure to address the endogeneity problem and find robust evidence.Our analysis reveals one possible mechanism through which foreign venture capital-backed firms are less innovative: foreign venture capital' inferior geographic proximity to IPO firms backed by them.Our study offers new insight to the effect of foreign venture capital in nurturing innovation in China.Third,we explore the relationship between investor attention to industries and firm valuations in the venture capital industry.Using aggregate search frequency in Baidu,we construct a direct measure of investor attention to an industry(ASVI)and find several main results.VC-backed firms with higher ASVI during the 30 days prior to the financing exhibit higher valuations.This result is robust to a variety of diagnostics analyses,including sample selection bias,endogeneity problem and alternative measures of ASVI.In addition,an increase in firm valuations is an attention-induced result rather than an information-based fundamental premium,which is supported by the evidence of a long-run reversal of firm valuations and worse performance of VC investments.Finally,syndicated investments and involvement of experienced venture capitalists can attenuate the effect of investor attention on firm valuations,which further support the attention hypothesis.Our findings show that the prices of venture capital investments are not just determined by the quality of ventures,the characteristics of venture capital,or market conditions,but also influenced by investor attention.There is a tradeoff between investor attention and the valuation that ventures can get.High attention can push up firm prices,however,as a tradeoff,the performance of both successful exits and exit return multiples is worse.Our findings also suggest that the overpricing driven by investor attention can be attenuated through some adjustments of investment strategies.These strategies make venture capitalists less vulnerable to investor sentiment and reduce the overpricing,which facilitates future performance of VC funds and subsequently their ability to raise future funds.