Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

We study how firm characteristics evolve from early business plan to IPO to public company for 50 venture capital (VC) financed companies. We find that firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to the formation of alienable assets. We obtain similar results from an out-of-sample analysis of all 2004 IPOs indicating that our main results are not specific to VC-backed firms or to the time period. The results suggest that, at the margin, investors in start-ups should place more weight on investing in a strong business (quot;the horsequot;) than on a strong management team (quot;the jockeyquot;). We also discuss how our results inform theories of the firm