How Do Corporate Venture Capitalists Create Value for ...

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Further we include a dummy indicating whether the firms’ product is related to an internet technology and also include the 6 month equal-weighted return on a portfolio of already public firms in the same Fama- French industry as the entrepreneurial firm. The latter variable captures the hot market effect (i.e. internet- bubble period or hot or cold IPO market year). While CVC backing does not directly affect an entrepreneurial firm’s propensity to have a successful exit, the CVCs’ presence improves the entrepreneurial firms’ chances for successful exit indirectly. We find that the higher the total amount invested by all venture capitalists and the higher the reputation of existing IVCs, the higher is a firm’s likelihood of having an IPO or an acquisition. Earlier, we showed that CVCs tend to invest significantly larger amounts than IVCs. In addition, we can see that CVCs attract high reputation IVCs to co-invest with them. In Panel B of Table 4b we conduct a similar probit analysis where we evaluate the propensity of a firm to have an IPO versus acquisition. We find that CVC backing positively affects the likelihood of a firm going public both directly (through a number of CVCs) and indirectly (through investing larger amounts). In Panel C we evaluate the time from first VC investment to exit (IPO or acquisition) for CVC- backed and IVC backed firms. The results show that it takes longer for a CVC backed entrepreneurial firm to go from the first venture investment to a successful exit. Overall, our evidence suggests that CVC backed companies are more likely to go have successful exit than IVC backed firms. Further, the probability of having an IPO rather than an acquisition is greater for a CVC backed firm. The longer time from first venture capital investment to exit attributed to CVC backed firms is consistent with our earlier findings that CVCs invest in younger firms, in less mature industries, and in earlier rounds (which may take longer time to reach profitability). 6. Post-IPO Performance of CVC and IVC Backed Firms In this section we investigate whether corporate venture capital backing generates higher product market value for entrepreneurial firms by comparing the post-IPO operating performance of CVC and IVC backed firms. Our objective here is to determine whether the pool of firms going public with CVC 20
acking is of higher quality (in other words, having the ability to generate superior operating performance) compared to the pool of firms going public with IVC backing. We also want to conduct a similar comparison between IPOs with high and low amounts invested by CVCs. In order to study whether the pool of firms backed by CVCs is different from that of firms backed by IVCs, we use two measures: post-IPO operating performance and post-IPO delisting probabilities. 6.1 Post-IPO Operating Performance We compare the operating performance of various IPO sub-samples using two approaches. First, we compare unadjusted operating performance measures for the full samples of CVC backed versus IVC backed firms, and high-CVC-investment versus low-CVC-investment firms. Second, we use a matching approach where each CVC backed (high-CVC-investment) company is matched to an IVC backed (low- CVC-investment) firm based on year, Fama and French (1997) industry, and size measured by total assets. In doing so, we ensure that each CVC backed (high-CVC-investment) company receives a unique match. We then compare the operating performance of the two samples of matched firms. 14 To measure operating performance, we use the following characteristics: (1) profit margin (net income including extraordinary items (Compustat item 172) divided by sales); (2) EBITDA as a percentage of assets (Compustat item 6); (3) EBITDA sales margin; (4) return on assets (net income including extraordinary items over book value of assets); (5) share of capital expenditures (Compustat item 128) in assets; (6) share of R&D (Compustat item 46) in assets; and (7) growth in sales. Tables 5a presents our analysis of the operating performance of various IPO sub-samples. We report the operating performance characteristics for the pre-IPO year (year 0) and five years post-IPO (1 through 5). Panel A provides median non-adjusted operating performance characteristics calculated using full IPO sub-samples. Panel B on the other hand gives statistics for the pair-matched sub-samples. 14 It is important to note that, in our setting, it is inappropriate to use the matching firm approach suggested by Barber and Lyon (1996), which advocates choosing a matching (benchmark) firm based on prior profitability and size. Matching on prior profitability would be appropriate only if we wished to determine whether there is a change in operating performance of firms subsequent to the IPO. Since our objective here is to detect differences in the quality (performance) of the pool of firms going public with CVC backing and those going public with IVC backing, matching on pre-IPO operating performance would be inappropriate, since this is equivalent to minimizing the quality difference we are attempting to detect. 21
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 and 12: a CVC since they represent financia
Page 13 and 14: Table 1 presents the summary statis
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: experience similar time from first
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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