Venture Capitalist Reputation and Portfolio Company Operating Performance

This paper studies the relationship between Venture Capitalists (VCs) reputation measures and a portfolio company’s operating performance. Extending previous studies focused on Return on Assets (ROA) as an operating performance measure, I study ROA drivers: profitability and revenue generation. Using three measures of reputation, I found that reputable VCs are positively associated with a portfolio company’s profitability and revenue generation in the pre- and post-IPO periods. Importantly, I demonstrate that reputable VCs bring value to their portfolio companies by relatively more relying on profitability over revenue generation than less reputable VCs in the pre-IPO period. Positive association of VC reputation with operating performance measures and reliance on profitability over revenue generation stays significant after controlling for VCs’ industry selection skills and self-selection bias, which appeared to be non-significant in my sample. My findings shed more light on a multidimensional impact of value-added activities across reputable and non-reputable VCs and help entrepreneurs better understand value propositions of each VC in a syndicate.