Evaluating Selection Bias in Early-Stage Investment Returns

Abstract

This paper uses administrative records from the universe of new firm starts in Norway to build a repeat-sales time-series valuation index for early-stage innovative firms as a tool for gauging the extent to which observed financial returns are biased relative to true underlying returns. The returns to innovation are highly skewed. Firms with multiple venture rounds grow as much as four times faster than ex ante comparable non--VC-backed innovative firms, but most of this difference is driven by firms receiving multiple equity rounds, regardless of the source, suggesting that firm selection is not the primary driver behind venture performance.

Keywords: selection, investment, entrepreneurship, venture capital, early-stage financing

JEL Classification: G11, G23, G24, G32