Is Venture Capital Worth it? Effects on Firm Performance and Founder Returns

The effects of venture capital on a venture'sperformance and on its founder's returns beyond an initial public offering(IPO) are studied. A "founder performance" construct (comprisingfounder's financial and non financial returns) is proposed, which is used tomeasure and compare returns to founders with returns to investors and firmperformance. The effects of pursuing venture capital are hypothesized and tested using asingle-year (1996) sample of IPOs. Pre-IPO characteristics included no venturecapital involvement, low venture capital involvement, and high venture capitalinvolvement. Post-IPO venture and founder performance are tested andcompared. Findings indicate that ventures in which venture capitalists hold acontrolling share of stock before the IPO have a better educated andexperienced management and accumulate more assets for growth through the IPO.When venture capital backing is very high, pre-IPO resources and fundingimprove significantly. Founders resorting to venture capital funding beforegoing public generate significantly less wealth for themselves and are lesslikely to remain as CEOs of their ventures.Thus, returns to foundersdecrease with venture capital involvement. Results suggest that foundersmotivated mainly by wealth or remaining in control of their ventures shouldminimize venture capital backing when going public.(TNM)