Firm Dynamics and the Returns to Early-Stage Investment

Abstract

Most new firm formation reflects self-employment with little ambition for growth, but a tiny fraction of new firm starts are founded by entrepreneurs who go on to attract significant amounts of capital and grow dramatically. This paper uses detailed administrative records to measure the returns to investing in such companies. Returns are extremely right-skewed, more than has been previously recognized. Venture investors outperform others when we control for firm performance and investment round, much more so than without these controls, which highlights the importance of contracting and exit timing over other factors determining returns.

Keywords: returns, investment, entrepreneurship, venture capital, early-stage financing.

JEL Classification: G11, G23, G24, G32