Thinning the Herd: The Impact of Venture Capital on Firm Performance

Abstract:     
The aggregate amount of venture capital investments in non-publicly traded firms since 1980 is more than $390 billion. We test three economic hypotheses on the connection between venture capital investment and subsequent performance. We find that lagged VC investments scaled by industry assets are negatively related to subsequent firm stock return and operating performance after adjusting for other factors. However, not all firms are equally impacted. We find that financially constrained firms and firms in competitive industries suffer the most when new VC money pours into an industry. Overall, our results are consistent with venture capital lowering the value of existing firms through increased competition.

Keywords: Venture capital, competitive industries, misvaluations

JEL Classifications: G14, G24

Working Paper Series