Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

48 Pages Posted: 16 Feb 2005  

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Berk A. Sensoy

Ohio State University - Fisher College of Business

Per Strömberg

Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2007

Abstract

We study how firm characteristics evolve from early business plan to IPO to public company for 50 venture capital (VC) financed companies. We find that firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to the formation of alienable assets. We obtain similar results from an out-of-sample analysis of all 2004 IPOs indicating that our main results are not specific to VC-backed firms or to the time period. The results suggest that, at the margin, investors in start-ups should place more weight on investing in a strong business ("the horse") than on a strong management team ("the jockey"). We also discuss how our results inform theories of the firm.

Keywords: Entrepreneurship, Venture Capital, Theory of the firm

JEL Classification: M13, G24, D23, L20

Suggested Citation

Kaplan, Steven N. and Sensoy, Berk A. and Strömberg, Per, Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies (August 2007). CRSP Working Paper No. 603. Available at SSRN: https://ssrn.com/abstract=657721 or http://dx.doi.org/10.2139/ssrn.657721

Steven Neil Kaplan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4513 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Berk A. Sensoy

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Per Stromberg

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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