In one of those only-in-academia newsflashes, an upcoming Journal of Finance paper goes through heroic analysis, complex equations, and fifty-seven pages to prove the obvious: the best venture firms invest in better companies, and those tend to go public more often. While that’s partly because the best VCs have more influence, it’s also because the best VCs’ investees are just plain better companies.
I find that companies funded by more experienced VCs are more likely to go public. This follows both from the direct influence of more experienced VCs and from sorting in the market, which leads experienced VCs to invest in better companies. Sorting creates an endogeneity problem, but a structural model based on a two-sided matching model is able to exploit the characteristics of the other agents in the market to separately identify and estimate influence and sorting. Both effects are found to be significant, with sorting almost twice as important as influence for the difference in IPO rates.