Can Venture Capital Funds Pick Winners? Evidence from Pre-IPO Survival Rates and Post-IPO Performance

Abstract

This paper documents pre- and post-IPO (initial public offering) differences in the performance of venture capital financed Israeli companies in comparison with other high-tech firms during the period 1991 to 2000. Using a newly constructed database we find that: the probability of survival until the IPO stage is higher for venture-backed companies, and according to several different measures, conditional on making an IPO, the post-listing performance of venture-backed companies is not statistically different from that of companies financed by non-venture financiers throughout the 1990s. One interpretation of these findings is that venture capital funds increase the survival rates of young technology-intensive firms; another is that there are fundamental – though not always observable – differences between venture backed companies and other high technology firms and venture capital funds select companies which are inherently more likely to go public. Both interpretations indicate that venture-backed companies are associated with low 'infant mortality,' but not with stellar post-IPO performance.