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Venture capitalists at work: A diff-in-diff approach at late-stages of the screening process

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  • Bronzini, Raffaello
  • Caramellino, Gianpaolo
  • Magri, Silvia

Abstract

In this paper we use a new methodology aimed at identifying only the venture capitalists (VC) treatment effect: we compare a representative sample of firms financed by private VC in the period 2004–2014 with a sample of firms rejected by VC at the very late-stages of the screening process. These firms narrowly lost the contest and are hence very similar, before VC financing, to the VC backed firms; self-selection is specifically taken into account. In line with previous results, Italian startups financed by VC reach a larger size and become more innovative than other startups. On the contrary, sales growth is similar and profitability is worse than firms in the control group. VC-backed companies experience larger rise in labor costs, while the commercialization of their innovative projects takes longer: this explains their worse profitability and the deterioration in their credit score. Both effects tend to disappear after four years from VC financing, when sales increase for VC-backed firms at the same pace as for the control group. Unlike other studies, no differences are detected for the survivorship rates of VC-backed firms in Italy. We also provide new evidence on the impact of VC on firms’ financial structures: VC-backed firms show a much larger increase in equity; this rise is however only half the increase in total assets that is hence not only explained by the injection of VC equity. Another result in this direction is that the effects on firms’ size and innovation hold when we restrict the control group to firms that also increase their equity from investors different from VC; this suggests that VC effects on size and innovation might also be linked to their managerial expertise and network connections. Finally, in line with previous evidence, the effects found in the paper are exclusively driven by independent VC investors compared with captive VC.

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  • Bronzini, Raffaello & Caramellino, Gianpaolo & Magri, Silvia, 2020. "Venture capitalists at work: A diff-in-diff approach at late-stages of the screening process," Journal of Business Venturing, Elsevier, vol. 35(3).
    • Handle: RePEc:eee:jbvent:v:35:y:2020:i:3:s0883902618300211
    DOI: 10.1016/j.jbusvent.2019.105968
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    Cited by:

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    2. Gabriele Beccari & Francesco Marchionne & Beniamino Pisicoli, 2022. "Alternative financing and investment in intangibles: evidence from Italian firms," Mo.Fi.R. Working Papers 174, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    3. Wesley II, Curtis L. & Kong, Dejun Tony & Lubojacky, Connor J. & Kim Saxton, M. & Saxton, Todd, 2022. "Will the startup succeed in your eyes? Venture evaluation of resource providers during entrepreneurs' informational signaling," Journal of Business Venturing, Elsevier, vol. 37(5).

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    More about this item

    Keywords

    Venture capital; Innovation; Firm financial structure; Difference-in-differences;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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