Hidden in Plain Sight: Venture Growth with or without Venture Capital

To identify the full set of firms with growth potential – irrespective of future funding source – we extend Guzman and Stern’s predictive analytics approach, and estimate a ‘VC-likelihood’ for all incorporated firms based on information that is available at the time of their founding

Christian Catalini; Jorge Guzman; Scott Stern

2019

Scholarcy highlights

  • The skewed nature of firm growth outcomes is a striking feature of the process through which entrepreneurship influences broader economic performance
  • Most of what we know about these growth firms comes from carefully constructed samples of firms funded by venture capitalists and angel investors
  • Though a large portion of firms grow without venture capital, many characteristics of these startups are strikingly similar to the characteristics of startups that are typically selected by VCs
  • Almost 50% of the firms that never raise VC are in the top 5% of our estimated VC Likelihood distribution, and non-VC-backed firms in the top 1% of the same estimate are over 350 times more likely to achieve an equity growth outcome
  • Our estimates of the ‘VC-effect’, while inherently imperfect because of our inability to capture many of the firm and founder characteristics VCs observe through their due diligence and screening process, place an upper bound on the contribution of VCs to growth
  • When we focus on the right tail of the estimated VC Likelihood distribution, the ‘VC-effect’ is substantially reduced: firms in the top 0.05% of our quality measure at birth, are only 2.3 times more likely to grow with VC funding than without it
  • Given how simple the observables from our prediction model are, their public nature, and the fact that they are collected many years before an exit event, it is striking to see how much they explain of the process of selection into VC and startup growth both for VC-backed and non-VC-backed firms

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