Data were collected for items identified in prior studies as central to venture capital decision making. A variety of secondary data sources were used, thus overcoming potential biases introduced by survey or observational techniques.
Two measures of venture capital funding were used. A dichotomous variable indicated whether or not a firm was backed by venture capitalists at the time of its IPO and a continuous variable indicated the percentage of equity owned by venture capitalists. While prior studies have used only the dichotomous distinction of whether or not firms received venture capital funding, this study also went a step further and examined factors related to the percentage of equity owned by venture capitalists at the time of the IPOs. Because the extent of influence venture capitalists have on firms can be closely linked to the percentage of the firms' stock they own, the more stock owned by venture capitalists the more likely it is that firms will fit the venture capitalists' ideal of what a promising new venture looks like. Venture capital investment data were recorded from IPO prospectuses.
The top management team (TMT) was defined as those managers listed in each prospectus as the management team. TMT data were collected from IPO prospectuses. Technical, industry, executive, marketing and finance experience were measured as the average years experience TMT members had in each area prior to joining the venture team. New venture experience was measured as the total number of new ventures TMT members had previously worked at. TMT age was calculated as the average age of TMT members. TMT education level was calculated as the average of the number of years typically required to complete the highest degree attained by each manager.
Strategy data were collected by content analysis of IPO prospectuses. While reading each prospectus, two researchers used five point Likert scales to indicate the degree to which they agreed or disagreed that differentiation, continuous new product development, service, premium pricing, marketing, low cost, and commodity products were emphasized as strategic weapons by the firm. A three point scale indicated weather a firm's product or service represented a proven technology, an incremental innovation, or a radical innovation. Entry order was classified as first mover, early follower, or late entrant. Number of customers was measured as few, several, or many. Product line breadth was captured with a four point scale indicating a single product, narrow line, intermediate line, or full line. A dichotomous variable indicated whether or not a firm focused on one particular market segment.
Financial data for the year preceding each firm's IPO were collected from Compustat PC+ and from prospectuses. Slack resources were measured as cash and marketable securities minus current liabilities. Current assets divided by current liabilities represented a firm's current ratio. Total debt divided by total equity was used to measure the debt to equity ratio. Given the sensitivity of return on equity to differences in debt position, and the sensitivity of return on assets to a firms' valuation of intangible assets, financial performance was measured as return on sales (ROS), which was calculated for each firm by dividing net income by total sales.
Archival sources were used to collect industry data for each firm at the four digit SIC code level. ROS data indicating industry financial performance were collected from Industry Norms and Key Business Ratios. Total sales (used to measure industry size) and growth in sales during the five year period preceding each IPO were collected from U.S. Bureau of Census data. Technological change was measured by counting the total number of patents issued to the industry during the five year period preceding the IPO based on data from Patenting Trends in the U.S. Finally, competitive intensity was calculated as the average change in market share of the top 8 firms in the industry during five years preceding the IPO, multiplied by the total firms in the top eight during that same time period. Market share data were collected from Ward's Business Directory of U.S. Private and Public Firms.
Measures of venture performance included
average sales growth and average earnings per share (EPS) for
three years subsequent to the venture's IPO. Data were
collected from Compustat PC+.
Because venture capitalists tend to fund firms at
specific times in their development (Bruno & Tyebjee, 1985;
Poindexter, 1976; Robinson, 1987; Tyebjee & Bruno, 1984;
Wells, 1974), it was necessary to control for firm age and size
when examining venture capital investment. Firm age was
specified as the age of the firm at the time of its IPO.
Firm size was specified as the number of people employed by the
firm at the time of the IPO.
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