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

Kaplan, Steven N.; Sensoy, Berk A.; Strömberg, Per

doi:10.2139/ssrn.657721

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

CRSP Working Paper No. 603

48 Pages Posted: 16 Feb 2005

See all articles by Steven N. Kaplan

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); University of Chicago - Polsky Center for Entrepreneurship

Berk A. Sensoy

Vanderbilt University - Finance

Per Strömberg

Swedish House of Finance; ECGI; CEPR

There 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: Suggested Citation

Kaplan, Steven Neil and Sensoy, Berk A. and Stromberg, 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