Venture Capital Investments in Europe and Portfolio Firms' Economic Performance: Independent Versus Corporate Investors

• DOI: http://doi.org/10.1111/jems.12170
• Author: Massimo G. Colombo,Samuele Murtinu
• Date: 01 February 2017
• Published date: 01 February 2017

Venture Capital Investments in Europe and

Portfolio Firms’ Economic Performance:

Independent Versus Corporate Investors

MASSIMO G. COLOMBO

Politecnico di Milano, Department of Management

Economics and Industrial Engineering

Milan, Italy

massimo.colombo@polimi.it

SAMUELE MURTINU

Universit`

a Cattolica del Sacro Cuore

Milan, Italy

samuele.murtinu@unicatt.it

Using a new European Commission-sponsored longitudinal dataset—the VICO dataset—we

assess the impact of independent (IVC) and corporate venture capital (CVC) investments on

the economic performance of European high-tech entrepreneurial firms during the period 1992–

2010. After controlling for potential sources of endogeneity and selection bias, our results indicate

that both IVC and CVC investments boost portfolio firms’ economic performance. These effects

are mostly due to an increase in real sales value. Moreover, the dynamics of the impact of VC

investments on firms’ overall economic performance and its components—real sales value, real

fixed assets, and real labor costs—differs depending on the type of investor. Finally, we do not

detect any impact related to the syndication of investments by both IVC and CVC investors.

1. Introduction

Venture capital (VC) is considered to be one of the most suitable financing modes

for young high-tech entrepreneurial firms to raise external capital (e.g., Gompers and

Lerner, 2001, 2004; Denis, 2004; Gompers et al., 2009). However, VC investors (VCs)

are heterogeneous and differ along several dimensions. One of the most important

dimensions of heterogeneity among VCs is the type of ownership and governance (Gompers

et al., 2009; Dimov and Gedajlovic, 2010; Da Rin et al., 2013; Bertoni et al., 2015), because

of its strong influence on VCs’ objectives and investment behavior, and on the value

investors can add to portfolio firms.1In this paper, we focus on independent and corporate

VCs (IVCs and CVCs), the two VC types that have attracted most scholarly attention.

To the best of our knowledge, no previous study has examined the impact of these two

1. Traditional independent VC firms manage pools of funds aimed at investing in promising companies.

VC managers define a business plan highlighting the type of entrepreneurial firms they are looking for,

and show such business plan to potential investors on the market (e.g., banks, pension funds, hedge funds,

insurance companies, university endowments, wealthy individuals, family offices). Once they raise sufficient

capital to start-up the fund, they screen the market to find promising young companies. If these latter sell an

ownership stake to the VC firm and give the VC firm a seat on the board of directors, they become portfolio

companies. The final goal of traditional VC firms is to either sell the portfolio company to another firm or

take it public in an initial public offering (IPO). The money raised by exiting the investment pays back the

investment and could give additional profits.

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume26, Number 1, Spring 2017, 35–66

36 Journal of Economics & Management Strategy

types of VC investments on portfolio firms’ overall economic performance.Thisisarelevant

gap because reliance on output measures—like innovation and sales growth—gives a

partial and incomplete view of portfolio firms’ performance.

As we will explain in detail in the next section, although IVCs aim at seeking capital

gains on behalf of their limited partners, CVCs typically pursue strategic objectives in

addition to financial objectives (Gompers and Lerner, 2000; Gompers, 2002; Hellmann,

2002). Moreover, CVCs provide portfolio firms with access to the valuable complemen-

tary assets possessed by their parent company (Dushnitsky, 2012). A growing body of

literature has compared the impact of IVC and CVC investments on portfolio firms’

innovation (Park and Steensma, 2013; Chemmanur et al., 2014), growth (Bertoni et al.,

2013), and the likelihood of going public (Gompers and Lerner, 2000; Ivanov and Xie,

2010; Park and Steensma, 2012).

In this paper, we adopt an overall economic performance metric to get a more

comprehensive assessment of the relative economic impact of IVC and CVC investments

on portfolio firms. Moreover, we explorethe dynamics of the performance impact of IVC

and CVC investments over time, and the channels through which this impact materializes.

As to the former point, we distinguish between the short-term impact of VC investments

(i.e., in the first two years after the first VC investment round) and the long-term impact

(i.e., in the period starting from the third year after the first VC investment round). As

to the latter point, the overall economic performance of portfolio firms can be increased

through two fundamentally different channels. An output-side performance increase

occurs when a firm manages to increase its real sales value—for example, through a

better commercialization strategy or the entry into new geographical markets—without

a corresponding increase of production factors. An input-side performance increase

occurs through a more efficient use of production factors, for example, when production

processes are reengineered. Lastly, we compare the impact on portfolio firms’ overall

economic performance of investments syndicated by IVCs and CVCs with that of IVC

and CVC investments. To the best of our knowledge, no previous study has examined

the performance impact of mixed IVC-CVC syndicates, in spite of the diffusion and

conceptual interest of this form of VC investment.

To address these research questions, we use a sample of European high-tech VC-

backed entrepreneurial firms observed in the period 1992–2010, and we compare them

with a matched sample of twin non-VC-backed firms. Data on both VC-backed and

non-VC-backed firms are drawn from a new longitudinal firm-level dataset—the VICO

dataset, that was built by the 7th Framework Program VICO project promoted by the

European Commission (http://www.vicoproject.org/). As is well known, there is low

coverage by commercial databases (e.g., the Thomson One database) of VC investments

in Europe, especially those conducted by nonindependent VC investors (Cumming et al.,

2014; Da Gbadji et al., 2015). Moreover, using the VICO dataset avoids misreporting

the VC investment types, which plagues many studies based on commercial datasets

(Ivanov and Xie, 2010, p. 135; see also Cumming et al., 2014). To control for selection

bias, we follow Chemmanur et al. (2011), and estimate a fixed effects (FE) regression

with “leads.” Further, to test the robustness of our main results we use an instrumental

variables (IV) approach. Finally, we implement (i) the tests developed by Chetty et al.

(2011) to assess the correlation between VC variables and variables omitted from our

models, which are likely to be correlated with firms’ overall economic performance and

might drive our results and (ii) the test developed by Altonji et al. (2000) to estimate the

maximum amount of selection on unobservables that can exist to reliably interpret our

results.

Venture Capital Investments in Europe and Portfolio Firms’ Economic Performance 37

This paper offers three original contributions to the literature. First, we show

that both IVC and CVC investments have a large positive impact on portfolio firms’

overall economic performance: the estimated magnitude of the performance increase

attributable to IVC and CVC investments is +41% and +50%, respectively. Conversely,

investments syndicated by both IVCs and CVCs do not lead to any increase in portfolio

firms’ performance.

The second contribution of this work is the investigation of the dynamics of the

portfolio firms’ performance improvements. Our results show that the short-term per-

formance impact of IVC investments is positive: its estimated magnitude is +26%. The

short-term impact of CVC investments, although similar in magnitude to that of IVC

investments, is not statistically significant. In the long term, both IVC and CVC invest-

ments have a statistically significant and economically relevant effect on portfolio firms’

overall economic performance (+58% and +67%, respectively).

The third contribution is the inspection of the channels through which IVC and

CVC investments improve the portfolio firms’ overall economic performance. Our re-

sults show that the performance improvements engendered by both IVC and CVC

investments are mostly attributable to the output side: the estimated long-term effects

on real sales growth are equal to +67% and +58%, respectively. IVC investments also

result in a significant short-term real sales increase (+36%), which is larger than the

short-term real sales increase engendered by CVC investments (+18%). This result is in

line with previous studies that found that IVC investors accelerate the sales growth of

their portfolio firms (Hellmann and Puri, 2000; Bertoni et al., 2013). As to the input side,

we highlight an important difference between IVCs and CVCs. IVC backing leads to an

increase of headcount and real payroll expenses, whose magnitude is smaller than that

of the increase in real sales value. Moreover,such increases materialize in the short term

(+21% and +19%, respectively), whereas after the second year from the first VC round,

we do not record any additional effect of IVC on headcount and real payroll expenses.

No impact on real fixed assets is observed. As to CVC investments, we do not observe

any significant effects on real payroll expenses, headcount, and real fixed assets neither

in the short term nor in the long term.

The paper is structured as follows. In Section 2, we review the extant literature.Sec-

tion 3 illustrates the construction of the dependent variable and the empirical methodol-

ogy.Section 4 describes the VICO dataset and the sample used in the empirical analysis,

and provides some basic summary statistics. Section 5 reports the results and several

robustness checks. Section 6 concludes.

2. Literature Review

Several studies have documented a positive impact of VC on portfolio firms’ perfor-

mance in terms of innovation (Kortum and Lerner, 2000; Bertoni and Tykvova, 2015),

growth (Bertoni et al. 2011; Puri and Zarutskie, 2012), overall economic performance

(Chemmanur et al., 2011; Croce et al., 2013), and the likelihood of going public (Giot

and Schwienbacher, 2007; Chemmanur et al., 2010; Puri and Zarutskie, 2012; Cumming

et al., 2014). VCs contribute to the success of portfolio firms in several ways. First, VCs

provide the financial resources that portfolio firms lack due to capital market failures

(Amit et al., 1998).2Second, VCs “coach” portfolio firms, providing added value in

2. Young high-tech entrepreneurial firms face serious difficultiesin raising capital from banks and other

traditional financial institutions (Berger and Udell, 1998; Carpenter and Petersen, 2002; Denis, 2004) because of