How Do Corporate Venture Capitalists Create Value for ...

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In the regression analysis presented in Panel C of Table 6b, we control for numerous factors that are likely to affect analyst coverage along with CVC backing. Here the dependent variable is the number of analysts following the firm within a year after its IPO date. We find that the presence of corporate venture capitalists, number of CVCs, share invested by CVC relative to total venture investment, and the presence of a corporate parent in an industry similar to that of the IPO firm positively affect analysts following. The effects are both economically and statistically significant. 7.4 Participation of IVCs in CVC Backed IPO Firms Finally, we analyze the quality (reputation) of independent venture capitalists co-investing with the CVC in IPO firms. We compare four distinct measures of the independent venture capitalist reputation across CVC and IVC backed IPOs: (i) average age of IVCs backing an IPO firm; (ii) dollar amount invested by these IVCs since 1965; (iii) average number of rounds the IVCs participated in since 1965; and (iv) dollar amount of funds raised over 5 years prior to IPO. To construct these IVC reputation proxies we use data reported in the VentureExpert database of SDC Platinum. We find that the average reputation of IVCs co-investing with corporate venture capitalists is no different from that investing in firms backed by IVCs alone. 7.5 Summary and Interpretation of Results Contradictory to what one might expect from the fact that IVCs are more frequent players in the IPO market compared to CVCs, we find that the extent and quality of participation by various market players are higher for CVC backed IPOs than for IVC backed IPOs. The underwriter reputation, participation by institutional investors, and analyst coverage are higher for CVC backed IPOs compared to IVC backed IPOs even after we control for various other factors that can potentially affect the participation of reputable market players. Furthermore, the reputation of IVCs co-investing with CVCs in CVC backed IPO firms is similar (i.e., not lower than) the reputation of IVCs investing in IPO firms backed by IVCs alone. The fact that despite bringing younger firms, further away from profitability (on average) to the 26
IPO market, CVCs are able to attract greater participation by more reputable market players indicates a signaling role of CVC backing in IPOs: i.e., backing by CVCs with superior industry knowledge seems to effectively communicate to various other market players that the IPO firms backed by them are high quality firms with good future prospects. 8. Valuation of CVC Backed and IVC Backed Firms at IPO In this section we study stock valuation of CVC backed and IVC backed IPOs. In an IPO market characterized by significant asymmetric information between firms issuing equity and outside investors, the ability of financial intermediaries such as venture capitalists to credibly communicate information about the true values of firms backed by them becomes very important. The analysis of the valuations of CVC and IVC backed IPO firms allows us to compare the ability of these two kinds of venture capitalists to reduce the degree of asymmetric information in the IPO market. One would expect firms backed by the intermediary with a greater ability to communicate their private information about the future prospects of the firm going public to equity market investors to be awarded higher valuations. 8.1 Methodologies Used to Compute Intrinsic Firm Value The first approach we use to estimate the intrinsic value of IPO companies is a matching technique based on an industry peer with comparable Sales and EBITDA profit margin (EBITDA/Sales) similar to that used by Purnanandam and Swaminathan (2005). Here we limit our consideration to the subset of IPO (and matching public firms) that have positive EBITDA and Sales. We first consider all firms in Compustat that were active and present on CRSP for at least three years at the end of the fiscal year preceding the IPO. We then eliminate firms that are REITs, closed-end funds, ADRs, not ordinary common shares, and firms with stock prices less than $5 at the report date. We separate the remaining population of Compustat firms into 48 industry groups based on the industry classification introduced by 27
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 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: Panel B of Table 6a reports the res
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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