How Do Corporate Venture Capitalists Create Value for ...

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years prior to the date of interest (similar to Gompers and Lerner (1998)); (iii) total dollar amount raised by an IVC since 1965; (iv) number of rounds the IVC firm participated in since 1965; (v) total dollar amount invested since 1965. We use these measures to control for the presence of IVC investment in an entrepreneurial firm since CVCs tend to co-invest with independent venture capitalists. 3.3 Round Financing Data To evaluate the investment patterns of venture capitalists we use data on round-by-round investments by VCs provided by SDC Platinum VentureExpert. Here we can classify the data into two groups. First, we obtain information about the set of firms that obtained venture capital financing in the period of 1980 to 2004. We exclude financial firms, firms that obtained round financing prior to 1980, firms with unclassified venture capital investments (e.g., those with foreign VC investors), and those with missing or inconsistent data. This gives us 24,549 distinct firms. VenureExpert provides us with the following information: (i) date of first and last round of financing; (ii) number of financing rounds; (iii) firm’s development stage at first investment round; (iv) SIC code; (v) date the firm was established; (vi) date and type of exit (e.g., IPO, acquisition, or write-off). We further update and cross-reference this information with other databases. Specifically, we update and fill in the missing values for SIC codes using Compustat data for already public firms and D&B and CorpTech Explore Databases for private firms. We find that the SIC codes provided by these databases coincide with ones provided by VentureExpert in 76% of the cases at 3 digit level and in 82% at 2 digit level. We further update and fill in the missing observations for the date the firm was established. We use Jay Ritter’s database for the subset of firms that went public and D&B and CorpTech Explore Databases for firms remaining private. Second, VentureExpert provides the information about venture round by round disbursements obtained by entrepreneurial firms. Between 1980 and 2004 there were 140,915 investment rounds by individual venture capitalists in portfolio firms. Here we can observe numerous characteristics of the financing round including: (i) identity of the investing VCs; (ii) round number; (iii) amount invested this round; (iv) total amount invested this round; and (v) post-round valuation. 10
Table 1 presents the summary statistics for the round-by-round financing. Panel A and Panel B present characteristics of round investments by CVCs and IVCs respectively in CVC backed firms. Panel C on the other hand reports these characteristics for IVC financing rounds in firms that are backed by IVCs alone. We observe that CVCs tend to invest in younger firms at earlier financing rounds compared to IVCs both in CVC and IVC backed entrepreneurial firms. Second, they invest significantly larger dollar amounts reaching on average $3.6 million compared to around $2 million invested per round by IVCs. Finally, CVC backed firms on average tend to be valued higher than IVC backed firms: $124 million for CVC backed firm versus $55 million for IVC backed firm. 3.4 Sample of IPO firms Significant section of the paper evaluates how CVCs affect an entrepreneurial firm’s access to the secondary market. Specifically, we compare the characteristics of CVC and IVC backed IPO firms. To accomplish this, we obtain the list of IPOs of equity from 1980 to 2004 from the SDC Platinum New Issue Database. In common with many other studies of IPOs, we eliminate equity offerings of financial institutions (SIC codes between 6000 and 6999) and regulated utilities, as well as issues with offer price below $5. The IPO should issue ordinary common shares and should not be a unit offering, closed-end fund, real estate investment trust (REIT), or an American Depositary Receipt (ADR). 11 Moreover, the issuing firm must be present on the Compustat annual industrial database for the fiscal year prior to the offering, as well as on the University of Chicago Center for Research in Security Prices (CRSP) database within three months of the issue date. We merge this IPO list with the VentureExpert database to construct consistent venture backing and corporate venture backing flags. We find that 287 of IPO companies have venture investments as reported by VentureExpert database but are classified as non-VC backed in SDC Platinum. We consider these firms to be VC backed. Similarly 365 are classified as VC backed in SDC Platinum but are not recorded 11 We do not rely on SDC classifications alone for identifying IPOs of ordinary shares. We independently verify the share type using CRSP share codes. 11
Page 1 and 2: How Do Corporate Venture Capitalist
Page 3 and 4: 1. Introduction How Do Corporate Ve
Page 5 and 6: documented that IVCs are able to cr
Page 7 and 8: control for firm industry, size, an
Page 9 and 10: Overall, our empirical findings ind
Page 11: a CVC since they represent financia
Page 15 and 16: We start with the probit analysis o
Page 17 and 18: could have received CVC financing b
Page 19 and 20: firms’ industry dummies to accoun
Page 21 and 22: experience similar time from first
Page 23 and 24: acking is of higher quality (in oth
Page 25 and 26: investment IPO firms are more likel
Page 27 and 28: Panel B of Table 6a reports the res
Page 29 and 30: IPO market, CVCs are able to attrac
Page 31 and 32: Market price is CRSP stock price an
Page 33 and 34: IVC backing dummy, and the reputati
Page 35 and 36: Our findings can be summarized as f
Page 37 and 38: Lindsey, L., 2004, “The Venture C
Page 39 and 40: Table 2a Patterns of Corporate Vent
Page 41 and 42: Table 3 Amount Invested and Pricing
Page 43 and 44: Table 4b Exit Strategies for CVC Ba
Page 45 and 46: Table 5b Probability of Delisting f
Page 47 and 48: Table 6b Market Participants in CVC
Page 49 and 50: Table 7b Valuation of CVC Backed an

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