Does venture capital impact firm performance?
Raising venture capital has become a prominent step in the growth of many companies. VCs have been portrayed as special investors who create unique value for the firms they invest in. This research looks at the relationship between venture capital funding and actual firm performance.
What you need to know:
Venture capital funding has the most positive impact on a firm that is between 6 and 12 years old, not yet publicly traded and operating within an industry where information is difficult to obtain. VC funding benefits firm growth, with limited to negative impact on profitability and stock market performance.
What did the researchers do?
Nina Rosenbusch, Jan Brinckmann and Verena Mueller asked: 1) does venture capital funding affect firm performance; 2) does the firm industry affect the relationship between the funder and the firm; 3) which firm performance factors (profitability, growth, stock market performance) are affected by VC funding; and 4) does the relationship context (firm age, IPO status, culture) determine success of the venture?
The research team conducted a meta-analysis of 76 studies of nearly 37,000 firms to answer these questions.
What did the researchers find?
The team found that VC funding had a small positive effect on firm performance overall, however this varied widely by industry. Firms saw the most benefit in the growth of their organization, with no effect on profitability or stock market performance. The positive effects of VC funding are decreased with very young or very mature firms, and funding seems to lose value after the firm goes public.
VCs seem to benefit most when there is ample information about the structure, status and dynamics of an industry, allowing them to choose more promising firms for investment. When this information is lacking, VCs are not able to select firms as carefully and their performance impact is lessened. The benefits that VC funding provides the firm are financial resources, managerial support and monitoring. However, these may be offset by disadvantages including a false sense of financial security, dependencies or restrictions related to the funding arrangement or high transaction costs passed along to the firm. These results suggest that the performance impact of VC funding is dependent on the context of the arrangement.
The researchers also found that once a firm has alternative means of raising funds, such as within the public market, the positive impact of VC funding diminishes. VCs are best suited to a “sweet spot” of firm maturity, industry information availability and firm access to financial resources.
How can you use this research?
Entrepreneurs can use this research to consider the value that a VC opportunity can provide them relative to other forms of funding. Firms seeking growth over profitability may find more success with VC funding.
Venture Capitalists can use this research to focus their funding efforts on firms between 6-12 years old who are not publicly traded and where industry information is not readily available to the public.
Want to know more?
Article citation: Rosenbusch, N., Brinckmann, J., Müller, V. (2013). Does Acquiring Venture Capital Pay Off For the Funded Firms? A Meta-Analysis on the Relationship Between Venture Capital Investment and Funded Firm Financial Performance. Journal of Business Venturing, 28, pp 335-353.