Do venture capitalists reduce underpricing and underperformance of IPOs?

The purpose of this article is to assess the effect of venture capitalists at Initial Public Offerings (IPOs). In so doing, a sample of Venture Capital (VC)-backed firms was compared with a sample of non-VC-backed firms. Consistent with the prevailing belief that venture capitalists reduce uncertainty at the offering, VC-backed IPOs are found to be less underpriced than non-VC-backed IPOs. Moreover, in multivariate analyses, venture capitalists affect negatively the degree of underpricing. Unlike previous studies, we control for the new listing and rebalancing biases in the analysis of the long term performance by comparing the IPO returns to carefully constructed size matched portfolios. Based on the calendar time and the event time approaches, the results show that both samples are underperforming the carefully constructed reference portfolios in the long term. The analysis also shows that the VC-backed IPOs do not outperform the non-VC-backed IPOs. The overall difference between both sets of IPOs is also not statistically significant.