Firm Dynamics and the Returns to Early-Stage Investment
47 Pages Posted: 13 Oct 2020 Last revised: 30 Aug 2021
Date Written: August 24, 2020
Most new companies neither grow nor attract outside financing, but a tiny fraction of innovative companies attract significant amounts of capital and grow dramatically. This paper uses detailed administrative records from the Norwegian Tax Authority to develop an ex ante measure of innovation and document the returns to investing in such companies. We trace out the entire funding and pricing histories of these firms to study transaction-level realized performance. Returns are extremely right-skewed, much more than has been previously recognized. Cross-sectional analysis shows persistent differences according to investor type that largely reflect different exit conditions.
Keywords: returns, investment, entrepreneurship, venture capital, early-stage financing.
JEL Classification: G11, G23, G24, G32
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