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

✍ Scribed by Chemmanur, Thomas J.; Krishnan, Karthik; Nandy, Debarshi K.

• Book ID: 121761158
• Publisher: Oxford University Press
• Year: 2011
• Tongue: English
• Weight: 324 KB
• Volume: 24
• Category: Article
• ISSN: 0893-9454
• DOI: 10.1093/rfs/hhr096

✦ Synopsis

We use the Longitudinal Research Database (LRD) of the U.S. Census Bureau, which covers the entire universe of private and public U.S. manufacturing firms, to study several related questions regarding the efficiency gains generated by venture capital (VC) investment in private firms. First, do VCs indeed improve the efficiency (total factor productivity, TFP) of private firms, and if so, are certain kinds of VCs (high reputation vs. low reputation) better at generating such efficiency gains than others? Second, do VCs invest in more efficient firms to begin with (screening), or do they improve efficiency after investment (monitoring)? Third, do efficiency improvements due to VC backing arise from increases in sales or reductions in costs? Fourth, do VC backing and the associated efficiency gains affect the probability of a successful exit (IPO or acquisition)? Our analysis shows that the overall efficiency of VC-backed firms is higher than that of non-VC-backed firms at every point in time. This efficiency advantage of VC-backed firms arises from For helpful comments or discussions, we thank seminar or conference participants at the NBER Entrepreneurship