Underwriter Closures : Implications for VC Firm Returns

The relationship between venture capital (VC) firms and underwriters is a central aspect of the startup ecosystem, but it is hard to identify to what extent underwriters influence VC firms' investment returns. Exploiting quasi-exogenous variation in underwriter closures and mergers, we find that lost underwriting relationships significantly reduce the likelihood of a startup exiting via an IPO up to five years following the event. Furthermore, we find that the impact of underwriter closures on IPO exits is larger for smaller funds, funds under pressure to liquidate their investments, and funds whose closed underwriters had been very active in the IPO market. In addition, VC firms that lose underwriting relationships typically see lower returns on their investments and face higher underwriting costs. Our findings support the hypothesis that underwriting relationships contribute to the value creation of VC firms