The performance of venture-backed IPOs in Europe

Abstract

The importance of venture capitalists (VCs) to the success of start-up firms and for economic growth has been well documented in the US. This study investigates the performance of European venture-backed initial public offerings (IPOs) during the period from 1996 to 2010 which includes two stock market cycles and IPO waves. We focus on underpricing (UP) and long-run performance and differentiate between various stock exchanges and firm characteristics. Our findings indicate that venture-backed IPOs generate positive returns for some time after the IPO. This result holds not only for investments in the primary market but also for investments made later on in the secondary market. During the new economy period (1996 to 2003) IPOs have higher UP and first year returns compared to IPOs during the second stock market cycle (2003 to 2010), but in the long run there are no significant performance differences. We also find higher abnormal returns for venture-backed firms that went public on main markets and for larger VC-backed firms for nearly three years after going public. Most importantly, the group of venture-backed IPOs consistently and significantly outperforms a large group of non-venture-backed IPOs. Overall, we provide empirical evidence that venture-backed IPOs in Europe generate positive and superior returns to investors.

Keywords:

• venture capital
• initial public offerings

Acknowledgements

We are grateful to the European Venture Capital Association, SIX Swiss Exchange, London Stock Exchange, NYSE/Euronext, NASDAQ/OMX, and Deutsche Börse for providing the data.

Notes

1. The focus of our work is on the impact that different IPO characteristics have on UP and long-run performance of VC-backed IPOs. It would be interesting to further differentiate between different types of VC funds (Cumming 2008; Cumming and Johan 2008) because they might have an impact as well, but this issue is beyond the scope of this article. We thank an anonymous referee for that comment.

2. We have opening prices on the first day of trading in the primary market available for only about half of our sample firms. Therefore, to retain a comprehensive sample size we calculated UP using closing prices at the end of the first trading day.

3. We repeated our calculations using the MSCI Europe as the benchmark index and the results remained the same.

4. We repeated our calculations dropping dead stocks out of the portfolio and calculating BHAR with the remaining IPOs and the results do not change.

5. For most firms, we do not have balance sheet data available at the time of the IPO. Therefore, we classify our sample firms based on the book value of assets at the end of the IPO year.

6. However, we need to be aware of the fact that going public on main markets and higher market or book values may be proxies for similar IPO characteristics.