“Smart Money”?  The Impact of Investor Mix on the Performance of New Ventures

Elisa Álvarez-Garrido

The Wharton School, University of Pennsylvania

eagarrid@wharton.upenn.edu

Research has documented that investor mix differs widely across firms, industries, and countries (e.g. La Porta, Lopez-de-Silanes, & Shleifer 1999). In this paper I ask whether investor mix affects firm's performance. In particular, I examine whether the experience and country of origin of investors affect the chances of a new venture going public or being acquired. Both a relational view of the firm (Dyer & Singh 1998) and the resource-dependence theory (Pfeffer & Salancik 1978) predict that those ventures that partner with investors with valuable resources will have a higher likelihood of experiencing a liquidity event. There is evidence that ventures backed by a venture capital firm perform better than those that are not (e.g. Megginson & Weiss 1991), which suggests they possess resources valuable for new ventures. However, venture capital firms are heterogeneous; in fact, some venture capital firms consistently outperform their competitors (Kaplan & Schoar 2003). I hypothesize that the experience and the country of origin are valuable resources and capabilities that confer venture capital firms a competitive advantage.

Using a sample of 689 biotechnology firms from outside the U.S. founded between 1990 and 2004, I test the hypotheses using a two-stage Cox regression model. I find that the greater the prior successful experience of the investors, the greater the likelihood of a liquidity event; however, investment experience without accounting for prior successful exits seems to have no effect. I also find that the presence of a U.S. venture capital firm in the syndicate greatly increases the likelihood that the venture goes public, though only when financial markets are less developed.

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Kaplan, S. N. & Schoar, A. 2003. Private equity performance: returns, persistence and capital. NBER, w9807.

La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 1999. Corporate ownership around the world. Journal of Finance, 54(2): 471-517.

Megginson, W. L. & Weiss, K. A. 1991. Venture capitalist certification in initial public offerings. Journal of Finance, 46(3): 879-903.

Pfeffer, J. & Salancik, G. R. 1978. The external control of organizations. A resource dependence perspective. New York: Harper & Row, Publishers.