Does VC investor reputation matter? An analysis of portfolio company success in Europe

Abstract

In this master’s thesis, we investigate the impact of venture capital (“VC”) investor reputation on portfolio company outcomes, specifically successful exits through initial public offerings (“IPOs”) or merger and acquisition (“M&A”) transactions in the European VC market. While prior research has examined the positive influence of reputable VC investors on their portfolio companies, such studies have mainly focused on the North American market. This study extends previous research by analyzing the effect of investors’ reputations on European portfolio companies in the 2000s, using reputation proxies that reflect the investor’s past exit track record in terms of conducted IPOs and M&As. We study both the quality of the past exit track record through proxies compounded from the investor’s gained market share of exits (“Capitalization Share”) and the quantity, i.e., frequency of exits (“Frequency”), to gain a comprehensive view of how the reputation affects the portfolio company success.

The study uses a sample of 2,244 European portfolio companies which received their first-time venture capital investment between 2000 and 2015, out of which 461 (21%) have exited successfully by 2019, and 1,783 (79%) portfolio companies are considered unsuccessful as an exit did not happen by 2019. We assess the impact of investor reputation on the likelihood of exit and time to exit through Logit and Cox Proportional-Hazards models. Investor reputation proxies, ”Capitalization Share” and ”Frequency”, are measured for each portfolio company’s first relevant VC round’s lead investor(s) past five-year exit track record preceding the investment. The majority of data used in the thesis is received from NGP Capital, a global VC investor with a proprietary data source. We also gather market and industry data from Refinitiv Eikon and Orbis.

We find that the Capitalization Share related proxies give more robust evidence for reputation’s positive effect on the investment outcome than Frequency related. The coefficients for Capitalization Share proxies remain significant and positive consistently through different models, whereas Frequency-related proxies receive positive coefficients, which do not remain significant as consistently. Additionally, we find no qualitative difference between the strength of indication for better exit outcomes, whether using IPO or M&A-related metrics. Both IPO and M&A Capitalization Share metrics provide a positive and significant effect of investor reputation’s impact on the successful exit outcome of the portfolio company. In contrast, IPO and M&A Frequency proxies partially support the hypothesis that an investor’s reputation has a positive effect on success.