Long-run IPO performance and the role of venture capital

Prior literature (e.g., Brav & Gompers, 1997) establishes that the average VC-backed IPO does not outperform return based benchmarks. In this paper, we show, by accounting for VC holdings, that the average VC-backed IPO exhibits positive alphas (1.22pp) as long as the VC remains invested. The significant overperformance can be fully explained by active VC monitoring efforts, which diminishes following the VC's exit. Alternative explanations such as market timing, signaling, and portfolio company selection cannot explain the return patterns.