Entrepreneurial Finance

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Sheraton Ballroom II
Hosted By: American Finance Association
  • Chair: Yael Hochberg, Rice University

How Do Venture Capitalists Make Decisions?

Paul Gompers
,
Harvard University
Will Gornall
,
University of British Columbia
Ilya Strebulaev
,
Stanford University

Abstract

We survey 281 venture capitalists at 220 firms to better understand how they make decisions about their investments and portfolios. We provide detailed information on venture capitalists' practices in sourcing, evaluating and selecting investments, structuring investments and managing those deals post-investing. We also explore cross-sectional variation in practices across industry, stage, geography and past success. We compare our findings to those for CFOs (Graham and Harvey (2001)) and private equity investors (Gompers, Kaplan, Mukharlyamov (2015)).

Going Entrepreneurial? IPOs and New Firm Creation

Tania Babina
,
Columbia University
Paige P. Ouimet
,
University of North Carolina-Chapel Hill
Rebecca Zarutskie
,
Federal Reserve Board

Abstract

Using matched employee-employer US Census data, we examine the effect of a successful initial public offering (IPO) on employee departures to startups. Accounting for the endogeneity of a firm’s choice to go public, we find strong evidence that going public induces employees to leave for start-ups. Moreover, we document that the increase in turnover following an IPO is driven by employees departing to start-ups; we find no change in the rate of employee departures for established firms. We present evidence that, following an IPO, many employees who received stock grants experience a positive shock to their wealth which allows them to better tolerate the risks associated with joining a startup or to obtain funding. Our results suggest that the recent declines in IPO activity and new firm creation in the US may be causally linked. The recent decline in IPOs means fewer workers may move to startups, decreasing overall new firm creation in the economy.

The Life Cycle of Corporate Venture Capital

Song Ma
,
Yale University

Abstract

This paper establishes the life-cycle dynamics of Corporate Venture Capital (CVC) to explore the information-acquisition role of CVC investment in the process of corporate innovation. I exploit an identification strategy that allows me to isolate exogenous shocks to a firm's ability to innovate. Based on this strategy, I first find that the CVC life cycle typically begins following a period during which corporate innovation has deteriorated and external information is valuable, lending support to the hypothesis that firms conduct CVC investment to acquire information and innovation knowledge from startups. Building on this analysis, I show that CVCs acquire information by investing in companies that are technologically proximate but have a different knowledge base. Following CVC investment, parent firms internalize the acquired knowledge into internal R&D and external acquisition decisions. Human capital renewal, such as hiring additional inventors who are capable of integrating new innovation knowledge, is integral in this step. The CVC life cycle lasts about four years, terminating as innovation in the parent firms rebounds. These findings shed new light on discussions about firm boundaries, managing innovation, and corporate information choices.
Discussant(s)
David Robinson
,
Duke University
Shai Bernstein
,
Stanford University
Josh Lerner
,
Harvard University
JEL Classifications
  • G2 - Financial Institutions and Services