Incremental Impact of Venture Capital Financing

Abstract

This paper investigates the differences in the return generating process of venture capital-backed firms and their peers that operate without venture capital financing. Using a unique hand-picked database of 990 venture capital-backed Belgian firms and a complete population of Belgian SMEs, we focus on the extent to which the presence of a venture capital investor affects the sensitivity of firm's returns to the changes in the capital structure, in the operating cycle, and in the industry dynamics. The differences may stem from the (self-) selection of better companies into venture capital portfolios, from the venture capitalists' value-adding activities, and/or from both. We examine them in the context of a complex simulation procedure with allows separating selection from value-adding when traditional approaches are difficult to implement. Our results indicate that venture capital-backed firms are able to extract more rent from the changing industry conditions, and from the optimizations in their capital structure. The presence of venture capitalists in the firm's equity seems to have only a marginal effect on the operating cycle efficiency. Overall the results are suggestive of the value-adding being the main driver for the VC-backed firm performance.

Keywords: Venture capital; Performance; Simulation; Value-adding; Selection

JEL Classification: L22, L25, M13, G30