CHANGES IN VENTURE CAPITAL FUNDING AND THE PROCESS OF CREATING NASCENT FIRM VALUE
Analytics
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Abstract
The financing of nascent firms, and how they evolve into public companies, has undergone tremendous transformation over the past decade. The methods in which financing is structured, the process of growing financial value, and the exit strategies used by initial investors in new companies have all evolved with the changes ushered in with the twenty-first century. This research studies three of the primary issues in young firm growth: Syndication of funding, the advent of seed accelerators, and the dramatic decrease in initial public offerings over the last decade.Chapter 1 examines the role of venture capital syndication in the firms' ability to efficiently time the initial public offering (IPO) market, as well as the benefits of syndication to the issuing firms and venture capitalists. In studying the affects of syndication on IPO market timing and pricing, this chapter addresses two interlinked issues. First, I analyze the impact of the level of venture capital syndication on the market timing of the IPOs. My findings indicate that there is a positive relationship between the level of venture capital syndication and IPO market timing. As a second analysis of this study, I examine the benefits of syndication and efficient IPO market timing, in terms of the firm, as well as the primary and secondary markets. Specifically, I examine the effects of venture capital syndication on initial returns, pre-IPO gain, and initial IPO price range. I find a positive, and significant, relationship between venture capital syndication and initial returns. I also find a positive, significant relation between venture capital syndication and the extent to which an offering prices above the midpoint of the initial filing range. Finally, the results indicate that there is a positive, significant relationship between syndication and the initial filing range.Chapter 2 examines the effects of seed accelerator program participation on subsequent follow-on funding. The first goal of the chapter is to determine whether accelerator participation affects ex post follow-on funding. I find that seed accelerator participation is significantly related to subsequent follow-on funding, after controlling for firm characteristics as well as macro-level variables. The results indicate that firms that participate in an accelerator program are more likely to receive follow-on funding in the three years that follow their initial seed funding. As a second component of the research, I also examine how the characteristics of the follow-on funding differ between accelerator participants and non-accelerated firms. I find that the follow-on funding of accelerated firms exhibits favorable characteristics, as compared to firms that do not participate in such a program. Specifically, I find a significant, positive relationship between accelerator program participation and the total amount of follow-on funding raised, the average amount of individual funding rounds, as well as the average time between funding rounds. Finally, I document a negative relationship between the number of funding rounds and accelerator participation.Chapter 3 studies the recent IPO trends in the market for real estate investment trusts, in an effort to determine if there is support for the primary theories related to the decline in initial public offerings (IPO). I study the causes of the decline in IPOs, from the perspective of real estate investment trusts, and present numerous results related to the validity of such theories, in this context. The results support the Economies of Scope Theory, and are inconsistent with the Regulatory Overreach Theory, with respect to small-firm REIT initial public offerings. I find that there is no relation between the number of quarterly small-firm REIT IPOs, as well as the dollar volume of such IPOs, and the Sarbanes-Oxley Act, the Global Settlement, and Regulation NMS, after controlling for changes in the economic climate for small firms. The results suggest that, except with respect to the Gramm-Leach-Blilley Act, the decline in the number of small-firm REIT IPOs has been a gradual trend rather than one punctuated by discrete shocks. Finally, the results provide limited support for the Regulatory Overreach Theory, with respect to the impact of regulations on the volume of large-firm real estate investment trust initial public offerings.