Evaluating Selection Bias in Early-Stage Investment Returns
72 Pages Posted: 25 Oct 2023 Last revised: 18 Jan 2025
Date Written: September 27, 2023
Abstract
This paper investigates sample selection bias in early-stage investment. We use comprehensive administrative data on the universe of new firm starts in Norway, allowing us to compare venture-backed firms with ex ante similar firms that do not receive venture backing. The valuation premium for venture-backing is around double at firm birth. It doubles again during the first five years of a firm's life, implying a substantial upward bias in VC returns relative to ex ante similar firms. We observe a similar, but smaller, bias for firms receiving multiple rounds of outside equity financing.
Keywords: selection, investment, entrepreneurship, venture capital, early-stage financing
JEL Classification: G11, G23, G24, G32
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