Venture Capital in Europe

and the Financing of Innovative Companies

Laura Bottazzi
Universit`a Bocconi, IGIER, and CEPR
and
Marco Da Rin
Universit`a di Torino and IGIER
July 2001
Abstract
Venture capital is considered to be the most appropriate form of financing for innovative
firms in high-tech sectors. Venture capital has greatly developed over the last three
decades in the United States, but much less so in Europe, where policy makers are striving
to help channel more funds into this form of financial intermediation. We provide the
first assessment of venture capital in Europe. We document its development in the 1990s,
also providing a conceptual framework for this analysis. Comparing the evolution and
structure of European and American venture capital, we find the wedge between these
two industries to be large and growing. We then look at the involvement of venture
capital with some of Europes most innovative and successful companies: Those listed on
Europes new stock markets. Venture capital is eective in helping these firms overcome
credit constraints, and thus to be born in the first place. Using a unique, hand collected
data set from the listing prospectuses and annual reports of these companies, we then find
European venture capital to have a limited eect on their ability to raise funds, grow, and
create jobs. We conclude that public support of the European venture capital industry
should look at both its growth and at its maturation.

Forthcoming, Economic Policy, v.34, 229-69, April 2002.

We thank Erik Bergl

of, Jean-Bernard Chatelain, Jan van Ours, Henri Pag`es, Guido Tabellini, and participants to the Economic Policy 33rd Panel Meeting for valuable comments. Detailed suggestions by Richard
Baldwin (the editor) helped us improve the quality of the paper. Veronica Guerrieri, Giuseppe Marano,
Gaia Narciso, and Battista Severgnini provided excellent research assistance. We also thank all the companies
which provided us with data and prospectuses. Financial support from Fondation Banque de France and from
Universit`
a Bocconi (Ricerca di Base) is gratefully acknowledged. All errors remain our own.

Introduction

The ability to encourage and sustain technological innovation is one of the main sources of
economic growth. In the last decade, the increasingly rapid pace of innovation induced by entrepreneurial firms has substantially contributed to the strong competitiveness and protracted
growth of the US economy. Several studies have documented the ability of US venture capitalists to select promising companies, provide adequate financing, and spur innovative firms
to behave aggressively and emerge as market leaders (see Hellmann (2000) for an overview).
A wide consensus among economists, business leaders, and policy-makers exists that a vibrant
venture capital industry is a cornerstone of Americas leadership in the commercialization of
technological innovation, and that the lack of venture capital hinders European firms from
competing on an equal footing (European Commission (1994)).
Several ocial documents of European governments and institutions suggest bolstering
venture capital and revamping the regulation of stock markets as remedies to Europes economic slugginesh and dismal unemployment. For instance, the European Commissions 1998
Risk Capital: A Key to Job Creation in the European Union Communication states as its
main message that [d]eveloping risk capital in the European Union, leading towards the
development of pan-European risk capital markets is essential for major job creation in the
EU (European Commission (1998) p.1). As the title of the Communication indicates, the
creation of a pan-European equity market for innovative companies was identified by the
Communication as a crucial step not only for providing risk capital to companies, but also
for the creation of a substantial number of new jobs.
More recently, the Final Report of the Committee of Wise Men on the Regulation of
European Securities Markets, urges governments and the European institutions to pay particular attention to ensuring that there is an appropriate environment for the development
of the supply of risk capital for growing small and medium sized companies, given the crucial importance of this sector for job creation (Committee of Wise Men (2001) p.10). The
Committee goes on to argue that [t]oday there is still an inadequate supply of risk capital
in the EU with venture capital only one fifth of US per capita levels. However, if the European Unions financial markets can integrate (...) European venture capital financing will be
encouraged from the bottom up (p.78).
Other ocial documents and reports identify the immaturity of Europes venture capital
industry and the hostility of its stock exchanges towards young firms as powerful obstacles to
the growth of European entrepreneurial firms (see for instance Bank of England (2000)). In

turn, entrepreneurial firms are viewed as major contributors to economic growth and to the
creation of new jobs (see German Federal Ministry of Economic and Technology (1999a,b)),
and venture capital as an important tool for job creation, technological innovation, export
growth, and regional development (European Investment Bank (2001)). There is a growing
perception that Europes growth problems may be caused not as much by rigidities in labour
markets, as by weakensses in capital markets, and in particular in the access to risk capital.
These documents raise important policy issues. In particular, it is crucial to understand
how policy can actually contribute to the growth of a dynamic venture capital industry in
Europe. European ocial documents, but also industry reports like the White Paper of the
European Venture Capital Association (EVCA (1998)), tend to focus on the supply of funds
and on the creation of favorable structural conditions for entrepreneurship. However, it is far
from evident which policy measures would be most appropriate to nurture venture capital in
Europe. Here the lack of rigorous investigation is felt most.
In this paper we provide a contribution in this direction by developing the first systematic
analysis (to the best of our knowledge) of venture capital in Europe. To get around the dearth
of firm-level data on European venture capital, we exploit the unique opportunity oered by
the opening in 1997 of Euro.nm, the alliance of Europes new stock markets for innovative
companies in high-growth industriesalong the lines of Americas Nasdaq. Euro.nm brought
under its wings the new markets of Amsterdam, Brussels, Frankfurt, Paris, and (since June
1999) Milan. Euro.nm ceased to exist as an alliance in December 2000, but its five members
have continued to operate independently. Over its life span, Euro.nm has allowed nearly 600
companies to list and raise over 40 billion euros of equity capital.
We collect a unique data set from issuing prospectuses and annual reports of more than
500 Euro.nm listed companies. These data provide an excellent opportunity to study the
eects of venture capital on Europes innovative companies, given the wealth of information
which they are required to disclose in order to go public. We focus on three key issues. First,
we develop a conceptual framework for appraising the role of venture capital in the financing
of innovative companies. Second, we document the development of venture capital in Europe,
compare it to that of US venture capital, and assess the extent and determinants of venture
financing to companies listed on Euro.nm. Third, we study the eect of venture capital on
the ability of these companies to raise funds, grow, and create jobs.
The evidence we provide is useful in assessing the extent to which European venture capital
helps create and nurture innovative companies. We challenge several common beliefs on the
role of venture capital in Europe, and question its ability to make a dierence for economic

growth and job creation. In particular, we argue that venture-backed companies do not grow
and create jobs faster than non venture-backed companies. Whether this is due to a lack of
stars among European firms or to the immaturity of European venture capital is not possible
to tell apart, but several pieces of evidence make the latter possibility more than likely. We
also have good news. We find that venture capital does help European innovative companies
by providing them with financing crucial for their creation and development. This also means
that an increasing number of (venture-backed) companies benefits from the possibility to go
public on Euro.nm, with a positive eect on the growth of Europes new stock markets.
Since venture capitalists benefit, in turn, of the possibility to exit their investments through
a listing on a stock market, this may have triggered a self-reinforcing virtuous circle.
These findings provide support for the European Commissions stated policy of promoting European venture capital. The major action of Commission in this respect has been
transformation of the European Investment Fund (EIF) into a major investor in venture capital funds. Our findings suggest that the quality of European venture capital should be as
urgent a concern for the EIF as its sheer quantity, so as to advance both the size and the
maturation of the industry.
The rest of the paper is organised as follows: Section 2 provides a primer on venture
capital based on the extant economics literature and on the available empirical evidence.
Section 3 develops a statistical portrait of the European venture capital industry, comparing
it to its American counterpart and assessing its involvement in financing Euro.nm listed
companies. Section 4 evaluates the role of European venture capital in the companies it
finances. Section 5 concludes. A Data Appendix contains a detailed description of our data
collection, and a Web Appendix provides additional tables and material.

2
2.1

Venture capital and the creation of innovative companies

History, definitions and jargon

In 1946 Georges Doriot, a professor at Harvard University, created American Research and
Development (ARD) together with Karl Compton, president of the Massachusetts Institute of
Technology, Merrill Griswold, chairman of Massachusetts Investors Trusts, and Ralph Flanders, president of the Federal Reserve Bank of Boston. ARD was created to raise funds
from wealthy individuals and college endowments and invest them in entrepreneurial startups in technology-based manufacturing: Modern venture capital was born. Half a century

later venture capital has become the form of financial intermediation most closely associated
with dynamic entrepreneurial start-ups, especiallythough not exclusivelyin high-tech industries like biotechnologies, computer hardware and software, information technology (IT),
e-commerce, medical equipment, and telecommunications.1 Many of todays most dynamic
and successful corporations received venture capital at the initial stages of their lives: Amazon, Apple, Cisco, e-Bay, Genentech, Genetic Systems, Intel, Microsoft, Netscape, and Sun
Microsystem, to name just a few. As a result, venture capital has developed into an important, established form of financial intermediation (see Gompers and Lerner (2001)).
The maturation was not smooth, though (see Gompers (1994)). Until the 1980s, venture capital firms were in large part publicly funded Small Business Investment Companies
(SBICs). While SBICs trained many venture capitalists and helped the industry reach a
critical mass by channeling large sums to start-ups, their ability to perform was limited by
bureaucratic constraints, lack of professional expertise, and a faulty design of capital structure
and incentives (Lerner (1994a)). Their investment record was in fact mixed, and spurred a
fall in investor confidence and in committed funds around the late 1980s. Also, many venture
firms, including ARD, were organized as closed-end funds, but this attracted retail investors
with short-term horizons, whose needs clashed with the long-term returns of venture capital.
Only in the late 1980s were SBICs and closed-end funds superseded by the limited partnership as the dominant organizational form of American venture capital firms. Another major
contribution to the adoption of a more ecient organizational form was the clarification, in
1979, of the Employment Retirement Income Stabilization Act, which allowed pension funds
to invest in venture capital. This resulted in a staggering increase of funds invested, and in
a faster professionalization of the industry.
Until the early 1990s, venture capital remained essentially an American phenomenon.
Its success in supporting dynamic companies which create jobs and wealth brought many
governments to look for ways to nurture a national venture capital industry. At the same
time, the high returns enjoyed by US venture capital firms induced venture capitalists to
become active also in other countries. Venture capital is by now a sizeable industry also in
Europe and Asia.
While no standard definition of venture capital exists, there is wide consensus that it
corresponds to the professional financing of young, unlisted dynamic ventures through equity
or equity-like instruments like convertible securities. Unlike wealthy individuals who occa1

Dynamic firms in traditional services, like Federal Express, Staples, or Starbucks, also received a sizeable
share of venture finance.

sionally invest in start-ups (business angels), venture capitalists are professional investors,
organised in small limited partnerships, who raise funds from wealthy individuals and institutional investors and invest on their behalf. They specialise in financing young firms
which typically have not yet produced any sales, but which have high growth and earnings
potentialmany investees are start-ups which come into life through venture financing.
Box 1 provides an explanation of some common terms of the venture capital jargon.

2.2
2.2.1

Financing an innovative company: The alternatives

How to start a start-up

Why do innovative companies in high-tech industries get financed primarily by venture capitalists? To set the stage for our empirical investigation, it is useful to consider what we know
about this question, and therefore what one would expect to find from companies backed by
a venture capitalist.
Consider the hypothetical case of a brilliant academic engineer who has just discovered
in his lab a technology to produce a new type of circuit for mobile phones. He believes his
product would make an important breakthrough by opening a market for three-dimensional
messaging. He thinks he could get rich and famous by creating a start-up which could hopefully go public. However, the industrial implementation of his product requires an investment
in the order of three million euros. This sum far exceeds his personal wealth and that of his
family and friends. He asks his bank for a loan, but is told that the bank does not lend to
start-upsunless enough collateral is pledged to cover the full value of the loan. The same
disappointing answer comes from several other banks he then contacts.
2.2.2

Why banks wont do

Why do banks typically refrain from investing in start-ups? The reason is that they are
not a suitable financier for this type of projects. Banks specialize in raising deposits from
the public, lending these sums to businesses, and earning an interest margin in the process.
The high liquidity of deposits requires that loans be made only to businesses likely to repay
within a relatively short period and with high probability. Banks also rely heavily on a firms
tangible assets for collateral, but the assets of entrepreneurial start-ups are in large part
intangible, like marketing knowledge or technology. In other words, the very nature of banks
makes them suitable to lend to firms in established industries, with reasonably predictable
cash flows.

Box 1: The jargon of venture capital

Start-up: a new company which is created by an entrepreneur in a high-tech industry,
often with the goal of going public within a few years.
Limited partnership: the typical form of organization of a venture capital firm. Its
general partners (venture capitalists) manage the firm and assume full liability,
while limited partners (investors) provide funds and assume no liability beyond
the contributed capital.
Captive: a venture capital firm which is owned by an industrial company or a financial intermediary. Captives are common in Europe, whereas in the US independent
venture firms, which raise money from institutional investors, are the norm.
Convertible securities: equity-like financial instruments which oer venture capitalists strong protection in case of liquidation, while ensuring participation in the
upside should the project succeed.
Vesting: a legal term which indicates the process by which a person comes into
possession of corporate stock. It usually applies to entrepreneurs or employees whose
right of possession over their stocks is contractually deferred until a certain date or
until certain targets are met.
Exit : the mode of exit from an investment. Venture capitalists typically exit their
investee companies through an IPO, a trade sale, or by writing-o (liquidating) a
non-performing company.
Initial Public Oering (IPO): the oering of corporate stock to the public through
which a company goes public. It is the most sought after way of cashing in their
investment by venture capitalists and entrepreneurs, since it allows the highest valuation.
Trade sale: sale of a start-up to another company, typically a large competitor. It is
a common way for venture capitalists to liquidate their investment when a company
is not growing enough for an IPO or the stock market is experiencing a downturn.
Write-o: the disaster scenario. When a funded company fails, the venture capital
writes o the investment from its assets. Most venture investments end up as writeos.
6

A start-up, on the contrary, is an utterly risky business: Most start-ups go bust but are
extremely profitable if eventually successful. Another reason for banks reluctance to finance
start-ups is their being heavily regulated intermediaries which face severe limits to holding
equity.
2.2.3

Some possible alternatives...

What other options could our engineer consider? The embryonic form of his project rules
out direct access to capital markets, which is feasible only for firms with a proven business
model, a solid organization, and a clear earning potential. Moreover, the capital needed by a
start-up (three million euros in our example) is far below the minimal threshold for an Initial
Public Oering (IPO). Government grants are also unsuited for such a project, since they
are typically targeted at very small firms, and often require a proven track record which no
high-tech start-up may provide (see Gordon (1998) and Lerner (1999)).
Four practicable options remain: convincing a business angel or a financial company to
invest in the start-up, finding an established industrial company interested in supporting the
project (a corporate venture capitalist), or going for a venture capitalist.
A business angel is a wealthy individual who invests directly in a private company (see
Benjamin and Sandles (1998) and Prowse (1998)). In some countries associations or groups of
business angels provide some legal and organizational support, but these individuals largely
invest based on personal relationships. In some cases they also provided expert knowledge of
an industry, since many of them are (or have been) executives.
A financial company is a holding company which invests in industrial companies. Financial companies rarely invest in start-ups. They prefer more mature firms which are close to
going public, to which they often provide bridge financing to strengthen a companys equity
base in the wake of the IPO.
A corporate venture capitalist is an industrial company which invests in start-ups directly
or through a dedicated subsidiarysuch as Innovacom, the venture capital arm of France
Telecom. Established companies invest in new ventures in order to keep up with technological
developments and acquire a foothold on possible breakthrough. In other words, they invest
for financial but also strategic reasons (see Hellmann (2001)). Corporate venture capitalists
bring to new ventures not only money but also knowledge of the market and organizational
strength (see Gompers and Lerner (2000)).

2.2.4

... and their drawbacks

Our engineer ponders over these possibilities. He discards business angels, since they are
a good source of funds, but only for smaller start-ups. Moreover, business angels lack the
financial power which is needed at later stagesand he would rather not risk being stranded
once his business starts rolling. Corporate venture capitalists have their drawbacks, too.
Sometimes, especially in Europe, they are bureaucratic and slow, while start-ups need speed
and thrust to succeed. Also, a start-up which threatens to cannibalise a major source of
revenue of its corporate venture capitalist may end up being delayed or even stopped. In fact,
start-ups backed by a corporate venture capitalist have been found to choose a less aggressive
strategy than those financed by independent venture capitalists (Zahra (1996). Our investor
believes his project to be highly innovative, and therefore wants to avoid the risk of being
put on hold by a corporate venture capitalist. His scant experience in business suggests
that a professional venture capitalist, with his extensive business contacts and experience in
mentoring start-ups, may be a better solution. These gains of being financed by a venture
capital seem to outweigh its costs, which consist of a constant scrutiny of all decisions, of the
risk of losing control if performance is unsatisfactory, and of the large amount of equity the
venture capitalist takes in exchange for his money and support. Our engineer decides to seek
support from a venture capitalist. What should he expect?

2.3
2.3.1

A conceptual framework for venture capital

The soft side of venture capital

Systematic accounts of the operations of US venture capital firms are provided by Barry et al.
(1990), Sahlman (1990), and more recently by Kaplan and Str
omberg (2000). These studies
show that venture capital constitutes a special form of financial intermediation, with contractual arrangements substantially dierent from debt contracts. The nature and complexity
of these arrangements suggest that the financial hard side of the capital contribution is
complemented by a non-financial soft side consisting of mentoring and monitoring. Venture
capitalists are often thought of as providing firms with expert advice together with stringent
incentives to perform. Venture capitalists expertise and network of contacts with potential
suppliers and customers allow entrepreneurs to focus on what they are best attechnical development. Their industry knowledge is precious for honing strategies. They concentrate on
start-up firms located nearby, and use their knowledge of industries and markets to evaluate
and mentor entrepreneurs. Indeed, most venture capitalists have higher degrees, and a tech-

nical, not economic or financial, background. Venture capitalists also provide reputational
capital by allowing firms to boast being venture-backed so as to lure top-fly executives or
to obtain new contracts. But venture capitalists are also demanding investors, who retain
the right to remove the entrepreneur from his post of chief executive ocer should she fail to
meet any agreed upon milestone. The combination of these soft sticks and carrots is widely
seen to provide venture-backed start-ups with an advantage over others firms, since it should
increase the chances of survival, and help start-ups attract further funding as they expand.
The narrative literature on venture capital documents extensively these soft aspects of
venture capital. For instance, Gorman and Sahlman (1989) find that the lack of business
experience of many entrepreneurs makes mentoring from expert venture capitalists crucial to
their chances of success. Survey evidence from four countries collected by Sapienza, Manigart,
and Vermeir (1996) shows that venture capitalists see themselves as mentors and advisors.
Sapienza (1992) also finds that the involvement of venture capitalists increase with the degree
of innovation pursued by a firm. Rosenstein et al. (1993) find that entrepreneurs who are
financed by leading venture capitalists regard these as the most useful board members.
More formal studies of how venture capital works in the US corroborate this anedoctal
findings. For instance, venture capitalists do not provide full financing upfront, but disburse
money in installments at dierent stages of a firms development. contingent on the achievement of milestones such as the construction of a prototype, a certain amount of sales, or the
hiring of key management figures. Financing at dierent stages is found to take dierent roles
(see Box 2) and to allow venture capitalists to gather information over time, thus keeping the
option of abandoning firms whose hopes of success have dwindled (Gompers (1995)). Venture
capitalists are also found to closely oversee investee firms, and to be active board members
who step in and take control when times get dicult (Lerner (1995)).
Some recent analyses of the influence of venture capital on corporate strategy and performance provide even tighter evidence that non-financial aspects are crucial to define the
activity of venture capital. Venture-backed firms are found to be faster in developing their
products and in bringing them to the market (Hellmann and Puri (2000))an important advantage in technology markets, where timing is essential to achieve market leadership. This
implies that venture capitalists provide dynamic companies with money but also with support
and monitoring of their management. Venture-backed companies are in fact found to pursue
more radical and ambitious product or process innovations than other companies (Hellmann
and Puri (2000)). Venture capitalists also play an important role in the professionalization of
the firms they invest in, for example by helping them hire experienced financial and marketing

executives and by firing under-performing chief executive ocers (Hellmann and Puri (2002)).
Very importantly, venture-backed companies produce more, and more valuable, patents than
non venture-backed firms (Kortum and Lerner (2000)).2 Venture capitalists also shield companies from the need to rush to markets, thus prematurely disclosing strategic information
to competitors. They also allow firms to go public only when market conditions are most
favorable (Lerner (1994a)).

Box 2: The stages and roles of venture capital financing

Seed finance: Small investment, in the order of a few hundred thousand euros at
most, which allows an entrepreneur to verify whether his project is feasible and economically attractive. At this stage the venture capitalist helps explore the viability
of a project.
Start-up finance: Investment aimed at making a firm operational by attracting the
necessary employees and executives, developing a prototype and/or implementing
marketing tests. At this stage the venture capitalist may become involved in the
organization of the company. His contribution to shaping corporate strategy is felt
most heavily at this stage.
Expansion finance: Investment aimed at reaching the scale of industrial production,
upgrading the production facilities and attracting further employees. At this stage
the venture capitalist may help find additional financing and help the company
contact clients and suppliers. As the company grows and needs revenue, he may
also help recruit marketing and other non-technical executives.
Later stage finance: Investment aimed at helping the firm grow fast enough to become a market leader and unleash its earning potential and to make it ready for a
trade sale or for listing on a stock exchange. At this stage the venture capitalist
may help set the stage for either a trade sale or an Initial Public Oering.

Venture capitalists also play an important role in the process of going public. Their experience helps
companies choose the most favorable time for their IPOs (Lerner (1994a)) and experience lower underpricing
(Megginson and Weiss (1991)). Venture-backed companies which went public in the US in the 1970s and 1980s
are also found to perform better than non venture-backed companies over five years spells (Brav and Gompers
(1997)).

10

2.3.2

Venture capital as a package of services

Why should the hard and soft sides of venture capital coexist under the same roof? In
standard economic conditions straight debt contracts provide the optimal form of financing
(Gale and Hellwig (1985)), so that the separation of financing and mentoring would also be
optimal. However, technological start-ups are not standard borrowers. A start-up relies on
the talent and skills of its founder, who knows more about its technical aspects than anybody
else. This makes it particularly dicult to evaluate her performance, and requires of the
financier a technical and not purely financial expertise. Moreover, running a laboratory
requires more freedom than operating a factory, so that an entrepreneur can more easily
appropriate funds than a manager in an established firm. Finally, entrepreneurs can use
privy information, like the status of technical tests, to pursue strategies which conflict with
the interest of investorslike rushing to market to gain a reputation of first-comer at the cost
of long-term profitability. Moreover, the very nature of entrepreneurship prevents start-ups
and financiers to write complete contracts which specify all conceivable future contingencies
(Hart and Moore (1998)). The right to control future strategic decisions is in fact even more
important in determining success for start-ups than for mature firms.
These characteristics of start-ups provide good economic reasons for the coexistence of
the hard and soft sides of venture capital. Financial economists have produced several
justifications for why the optimal contract between entrepreneur and venture capitalist should
be dierent from debt. Optimal financing should not arrive all upfront but should be staged,
coming once new milestones have been met, in order to reveal information on the venture as
it arises (Admati and Pfleiderer (1994) and Bergemann and Hege (1998)). Financing of startups should also take the form of convertible securities in order to induce the entrepreneur
to behave eciently (Cornelli and Yosha (1998), Repullo and Suarez (1999)), and to allow
financiers to take control of the venture if the entrepreneurs under-performs (Berglof (1994).
A key aspects of these models is that, unlike in standard financial contracting, both the
entrepreneurs eort and the venture capitalists mentoring and monitoring are not verifiable
by a court, and therefore cannot be contracted upon. A start-up therefore creates a situation
where both sides have special skills to contribute for which they experience a problem of moral
hazard. This situation is fundamentally dierent from that of a bank loan, and in the context
of start-up finance a standard debt contract simply does not work. A formalization of these
results can be found in Casamatta (2000), who focuses on the complementary role of the hard
and soft sides of venture capital, and in Hellmann (1998), who shows that the expertise of

11

a venture capitalist in replacing an under-performing entrepreneur as CEO of his company

is a necessary ingredient for convertible securities to entail an optimal allocation of control
rights.

Venture capital in Europe: A statistical portrait

3.1

Venture capital in Europe and the US: A comparison

The first step in assessing the contribution of European venture capital to the creation of
innovative companies requires a quantitative look at the state and structure of the European
venture capital industry and at its evolution over time. Since the US venture capital industry
is the most mature and developed, we use it as the term of comparison for European venture
capital.
We base our analysis on the aggregate statistics published by the European Private Equity
and Venture Capital Association (EVCA) for Europe and by the National Venture Capital
Association (NVCA). These data come from extensive surveys of venture capital firms in
both economies. For Europe, EVCA distributes each year a survey to venture capital firms
irrespective of their EVCA membership status in cooperation with PricewaterhouseCoopers.
For 2000, the last available year, the number of respondents was 949, corresponding to a
70% response rate. The yearly statistics published by NVCA are based on the commercial
database VentureXpert by Venture Economics, a division of Thomson Financial Securities,
which contains data on over 5,000 American venture capital firms.
Tables 1 through 6 and Figures 1 and 2 report our elaborations on these aggregate data
for 1991-2000. There is much that one can learn from these data. Figure 1 shows the amount
of funds raised by venture capital firms, and Table 1 provides a break-down of the sources of
finance. The explosion in venture capital activity during the 1990s is apparent, but has been
uneven. In the US, the amount of funds raised increased by a factor of 80.
Figure 1 about here
In Europe, only by a factor of twelve. What is intriguing is that the level of funding
in Europe increased mostly after the opening of Euro.nm in 1997, which paved the way for
the listing of high-tech start-ups. Whether this coincidence conceals a causal link or reflects
broader changes cannot be told apart based on simple inspection of these figures, but it
suggests a challenging research topic. Figure 1 also shows a widening gap in the amount of

12

funds raised in the two economies (which we express in dollars for sake of comparability). The
figure also shows that growth has been smoother in the US, whereas Europe has experienced
several ups and downs.
Venture capitalists finance their activity by raising funds from institutional investors like
pension funds, insurance companies, or endowments. Each fund is invested in a number of
firms with a five to ten years horizon. Once a fund is ended, its cash proceedings, which
come from IPOs and trade sales, are distributed to investors together with any remaining
equity holdings. Table 1 uncovers a substantial dierence in the structure of venture capital
funding across the Atlantic. Institutional investors (mainly pension funds) are by far the
largest contributor in the US, accounting for nearly two thirds of all funds, as compared to
less then one third in Europe. The stability of the share of institutional investing in the US is
also worth pointing out as a sign of maturity of that market. European venture capital is instead dominated by funding from financial institutions (mainly banks), which still remain the
largest source of funding. Funds controlled by a financial or corporate entity (captive funds)
are in fact more common this side of the Atlantic, where the share of corporate investment
has doubled in the second half of the 1990s.3 The table also highlights the lower reliance of
American venture firms on other sources (individual investors and realized capital gains),
another sign of the maturity of that market. Government funding is virtually inexistent in the
US, where publicly-funded Small Business Investment Companies are not considered venture
firms, and it is low in Europe. These profound dierences in funding patterns largely reflects
the dierent structure of capital markets in the two economies. Europe is still dominated
by banks, which control a large part of the mutual funds industry. Since also the nascent
pension fund industry is likely to be controlled by banks, we should expect these dierences
to persist, and to influence the behaviour of venture capital firms.

The drop in the share of corporate funding in the US in 2000 is partly due to the shift from corporate
funds to in-house corporate investing, which does not get recorded in NVCA statistics.

13

Table 1. Venture capital: Sources of finance

Europe
Institutional Investors

Corporations

Financial

Government

Other

(%)

(%)

(%)

(%)

(%)

1991

15

48

30

1992

13

45

27

1993

16

40

33

1994

20

41

27

1995

29

36

27

1996

34

35

26

1997

26

11

42

19

1998

24

10

37

24

1999

23

10

43

19

2000

31

10

32

22

United States
Institutional Investors

Corporations

Financial

Government

Other

(%)

(%)

(%)

(%)

(%)

1991

76

13

1992

67

17

12

1993

73

12

1994

69

10

12

1995

59

20

16

1996

70

20

1997

56

25

13

1998

66

12

10

12

1999

61

14

16

2000

61

23

12

Notes: Institutional investors includes endowments and pension funds, corporations include investments by corporations (including corporate venture capital through dedicated funds), financial institutions includes banks, insurance companies, and funds raised from capital markets, other includes
individuals and realized capital gains. European data in millions of euros (ECUs before 1999) and US
data in millions of dollars.
Source: Authors calculations on EVCA and NVCA data.

14

Taken at face value, the aggregate funding data shown in Figure 1 would suggest that in
the second half of the decade Europe has seen an impressive growth in the amount of funds
raised, which increased nearly twelve-fold between 1995 and 2000 after remaining stagnant
in the first half of the decade. Unfortunately, this is not the case. Figure 2 and Table 2 tell
us why. The problem is that aggregate data for funding comprise two very dierent types
of data. They include funds raised for venture capital, but also funds raised by firms which
specialize in management buy-outs (MBOs). These are financing operations which enable
management to acquire (buy out) an existing business from its original owners. MBOs
typically involve established companies in mature industries, and are therefore quite distinct
to venture capital, which is directed to new ventures.4
Figure 2 about here
That the resulting bias is serious is shown by Figure 2, which plots the amount of funds
invested each year. Aggregate data on investments separate between funds which go into
venture capital proper and into MBOs.5 Once we compare the amount of funds raised with
that of funds invested into venture capital proper, we see that the performance of Europe
is less thrilling than suggested by Figure 1: The growth of funds invested in venture capital
between 1995 and 2000 has been near six-fold, a mere fourth of that experienced in the US. A
similar results holds if we look at the whole decade, since its early years saw sluggish growth
in both economies. Despite the rise of venture capital activity, the gap between Europe and
the US has actually widened, and at an increasing pace.
Table 2 reveals that European venture capital invests an increasing share of its funds
at early stage, which are those where its contribution is expected to be most significant,
though the monetary amount invested in early stage in Europe is about a fifth of what is
invested in the United States. In Europe, the share of early stage financing has more than
doubled between 1997 and 2000, and since 1999 it has been greater than in the US. Again,
though one is intrigued by the coincidence of the opening of Euro.nm and the increase in this
riskier type of investments, a causal can only be conjectured at this stage. In both countries
the majority of funds goes to expansion investments. These go to companies which have
4

EVCA started separating the amount of funds raised for these two purposes only in 1999.
It should be noticed that the amount of funds raised and invested each year may diverge, since venture
capital firms invest the money they raise over a three to five year time span. Therefore they may accumulate
resources when good investment opportunities are scarce, and invest more when good projects abound. For
instance, US venture capital firms raised 29.1 billion dollars in 1998, but invested only 19.2 of them, whereas
in 2000 they invested about 8 billions more than they raised.
5

15

survived the perilous early years and have shown good success prospects. As for funding, the
higher variability of investment patterns in Europe can be taken as a sign of immaturity of
the industry, which still has to find a stable structure.

Table 2. Venture capital investments, by stage

Europe
Total

of which in VC

(Early stage %)

(Expansion %)

(Later stage %)

1991

6,381

3,429

10

80

10

1992

6,354

3,828

10

76

14

1993

4,639

2,794

78

14

1994

6,635

3,707

10

75

14

1995

7,370

3,952

11

77

12

1996

8,389

4,652

12

71

18

1997

8,992

5,388

15

70

15

1998

15,662

7,636

23

62

15

1999

25,628

12,623

27

64

2000

33,177

19,516

32

63

(Early stage %)

(Expansion %)

(Later stage %)

United States
Total

of which in VC

1991

2,464

2,257

32

47

21

1992

5,059

3,759

25

43

32

1993

4,919

4,560

40

36

24

1994

5,263

3,723

35

32

33

1995

5,471

4,810

40

38

22

1996

11,211

9,676

38

37

25

1997

17,213

14,931

26

47

27

1998

21,981

19,190

30

46

24

1999

59,372

54,111

24

53

23

2000

103,494

100,622

24

56

20

Notes: Data are in millions of current dollars. Early stage includes seed and start-up financing.
Source: Authors calculations on EVCA and NVCA data.

The gap between Europe and the US is also evident from Table 3, which compares the
amount invested in venture capital as a percentage of GDP in the US, in Europe, and in some

16

of its national economies. Two facts stand out. First, Europe invests a smaller share of its
GDP into venture capital than the US, a dierence which widened in 2000, reflecting the boom
in venture capital investment on the western side of the Atlantic. The second striking fact
is the large and persistent variability of venture capital intensity across European countries.
One also notices that a higher venture capital intensity does not necessarily corresponds to a
higher number of stock market listings. Countries like Sweden, Belgium or the Netherlands,
with a high venture capital intensity, have very few companies listed on Euro.nm. One likely
explanation is that many venture-backed companies from these countries list in the US on
Nasdaq, or in their national traditional stock markets. For instance, 25 Dutch companies
are listed on Nasdaq, 9 of which did so since 1997. One intriguing fact is that the opening
of Euro.nm seems to have spurred also venture capital intensity at national level, albeit
with some delay. Indeed, intensity increased more than sixfold in Germany since 1997, and
nearly doubled in France since 1996, the year the Nouveau Marche opened. Not all countries
experienced such an upsurge, though. Venture intensity in Italy and Belgium, for instance,
has languished.

Table 3. Venture capital investments as a percentage of GDP

US

Europe

UK

Germany

France

Sweden

Italy

Belgium

Nether.

Spain

1990

0.05

0.01

0.11

0.04

0.06

0.02

0.02

0.04

0.07

0.02

1991

0.04

0.01

0.09

0.04

0.07

0.01

0.04

0.03

0.07

0.04

1992

0.06

0.01

0.08

0.03

0.06

0.01

0.04

0.08

0.06

0.03

1993

0.07

0.01

0.07

0.03

0.06

0.01

0.02

0.05

0.06

0.03

1994

0.05

0.04

0.09

0.03

0.06

0.05

0.02

0.05

0.09

0.02

1995

0.06

0.04

0.09

0.03

0.04

0.02

0.03

0.05

0.12

0.03

1996

0.12

0.05

0.09

0.03

0.06

0.11

0.04

0.05

0.13

0.04

1997

0.18

0.06

0.11

0.05

0.10

0.04

0.04

0.08

0.19

0.05

1998

0.21

0.09

0.16

0.07

0.07

0.06

0.06

0.10

0.24

0.05

1999

0.58

0.14

0.21

0.13

0.13

0.20

0.06

0.27

0.34

0.10

2000

0.78

0.17

0.38

0.30

0.10

0.21

0.07

0.10

0.80

0.08

Notes: Venture capital spending from EVCA and NVCA data. National GDP data from the International Financial Statistics of the IMF, GDP for Europe (EU-15) and for the US from the Monthly
Bulletin of the OECD.
Source: Authors calculations on EVCA and NVCA data.

17

Table 4 provides data on the sectoral distribution of venture capital investments.6 While
dierences in sectoral classifications make it dicult to closely compare EU and US patterns,
some facts stand out. Most notably, manufacturingwhich includes consumer and industrial
productsplays a major role in Europe, but only a marginal role in the US. While this is
partly due to the inclusion of MBOs in the European data, its lower propensity to high-tech
investments is confirmed by the relevance of investments in agriculture and finance (other in
the table). The evolution of investment patterns is also telling. Europe is much less dynamic,
and the relevance of investment in more advanced sectors has only begun in 1999. The US,
instead, shows a more flexible investment attitude. For instance, the share of money put into
biomedical companies has shrunk the last few years, which have seen a boom of computer
investments, which include Internet-related companies.

6
Unfortunately data for Europe are inclusive of investments in MBOs, since a sectoral breakdown for venture
investments is not published by EVCA. This may be one reason behind the predominance of investment in
traditional sectors in Europe.

18

Table 4. Venture capital investment destination, by sector

Europe
Telecom

Computer

Manufacturing

Biomed

Electronics

Other

1991

56

27

1992

58

26

1993

59

24

1994

61

24

1995

56

20

1996

52

29

1997

51

24

1998

46

26

1999

12

11

50

18

2000

14

13

43

10

16

United States
Telecom

Computer

Manufacturing

Biomed

Electronics

Other

1991

12

19

13

25

17

14

1992

21

12

22

10

27

1993

21

30

21

13

1994

17

18

23

10

23

1995

18

21

12

22

12

15

1996

15

27

20

22

1997

16

30

27

11

1998

16

36

17

11

12

1999

17

56

2000

17

58

Notes: European data in millions of euros (ECUs before 1999) and US data in millions of dollars.
Biomed includes biotechnologies, medical technology and healthcare; Computer includes online and Internet start-ups; Manufacturing includes industrial products, consumer products, energy; Electronics
includes computer hardware and semiconductors. Other includes agriculture and financial services.
Source: Authors calculations on EVCA and NVCA data.

19

Table 5 shows another interesting dierence between the structure of venture capital
investments in the two economies. While Europe invests much less in venture capital than
the United States, it supports a much larger number of companies, nearly twice as many.
This means that the average amount invested per company is much smaller in Europe, where
money is spread very thinly across companies.

Table 5. Venture capital backed companies

US companies

EU Investments

EU companies

1991

1,088

5,615

n.a.

1992

1,294

5,088

n.a.

1993

1,150

4,422

n.a.

1994

1,191

4,459

n.a.

1995

1,325

3,891

n.a.

1996

2,002

4,081

n.a.

1997

2,697

5,044

3.967

1998

3,149

6,062

5,083

1999

3,969

9,470

7,335

2000

5,412

12,958

9,574

Notes: Data are counts of exits.

Source: Authors calculations on EVCA and NVCA data.

An interesting way of looking at the evolution of the venture capital industry is also to
consider the number of venture capital firms. A problem in this respect is that no standard
definition or registry of venture capital exists. Thereforeunlike banks or brokersone must
resort to a subjective criterion to identify venture capitalists. What we did was to consider a
venture capital firm as such if it belongs to EVCA, whose directories since 1990 are available.7
Based on this definition, Table 6 provides some interesting insights in the dynamics of the
venture capital industry. The numerosity of venture firms confirms that Europe still has some
way to go before boasting a venture capital industry as thick as in the US.
The number of venture capital firms in Europe remains nearly half than in the US. It
also interesting to notice that the high growth of the American industry has started at least
7

Despite contacting the major national venture capital associations, we could not obtain their pre-1999
directories.

20

in 1995, together with the growth wave in funding and investment. In Europe, instead,
the number of venture capital firms almost doubled over just three years, raising again the
question of what role the opening of Euro.nm might have played in this. Indeed, the five
countries where a new stock market opened accounted for almost half of the total growth
in the number of EVCA members since 1997. Also the numerosity of venture capital firms
is much greater in those countries with an active stock market for innovative firms. Italy is
the only exception, with a small and less dynamic venture capital industry. Taken together
with the dierence in organizational structure (Jeng and Wells (2000)), funding sources and
investment behavior, these numbers oer a picture of deep dierences in the venture capital
industries of the US and Europe. What might that mean for the financing of innovative
companies is the object of the rest of this article.

Table 6. Venture capital firms, EU and US

US

EU

UK

Germany

France

Sweden

Italy

Belgium

Spain

Netherlands

1991

389

163

42

11

30

10

12

21

1992

397

161

38

15

29

12

11

20

1993

401

159

40

13

29

11

12

19

1994

400

162

42

15

27

11

14

17

1995

425

169

40

18

32

11

13

16

1996

460

176

42

20

31

13

13

18

1997

507

184

52

27

32

12

16

19

1998

547

210

61

36

33

12

17

10

25

1999

620

331

79

51

48

11

16

23

14

32

2000

693

424

90

75

59

22

19

30

17

33

Notes: Venture capital firms members of EVCA and NVCA.

Source: Authors calculations on EVCA and NVCA data.

21

3.2

Venture capital in the winners circle: venture-backed companies on

Europes new stock markets

Aggregate data provide an intriguing picture, but they raise more questions than they can
answer. One is left with the impression that European venture capital has substantially
developed over the last decade, but that it has also lost ground to the US industry in its
ability to fund innovative start-ups. Aggregate data cannot tell us much about how eective
European venture capital has become in nurturing fast-growing companies. Has the growth
in the size of the industry corresponded to a growth in its ability to support the creation
of innovative companies, or not? The only way to obtain a convincing answer is to turn to
firm-level data.
Here we face serious obstacles. While in the US commercial companies like VentureOne
and Venture Economics have been gathering comprehensive and reliable data on venture
partnerships and venture-backed firms since the 1970s, in Europe systematic data collection
of this sort has begun only very recently. Therefore we cannot yet rely on adequate data for
in-depth empirical inquiries.
A number of studies conducted for industry associations portrait venture capital as conducive to job creation and to the growth of technologically oriented firms. Venture-backed
firms are found to grow faster, create more jobs, and export more than established firms. For
instance, between 1993 and 1997, British venture-backed companies increased employment
by an yearly 24%, and sales by an yearly 40%. By comparison, employment at the hundred largest British listed companies grew by 7%, and sales by 15% (BVCA (1999)). On a
European scale, between 1991 and 1995, employment at venture-backed companies grew by
an yearly 15% and sales by an yearly 35%, as compared to 2% and 14% for the 500 largest
European listed firms (EVCA (1996)).
Suggestive as they are, these studies are based on a few stylized facts which are still
to be rigorously tested.8 At least two problems make their findings unconvincing. First,
they suer from severe survivorship bias, since they only look at successful start-ups without
considering the much large number of those which failed. A correct comparison should look
at both winners and losers, taking into account that small and medium enterprises (SMEs)
suer from a high mortality rate (OECD(1998)). The contribution of SMEs to economic
growth or net job creation is in fact far from obviously positive, and has been recently
8

Stimulating case studies on the dicult gestation of European venture capital in the 1980s and 1990s are
provided by Becker and Hellmann (2000) and by Freeman (1998).

22

challenged in a series of studies (see Audretsch and Thurik (1999)). Second, these studies
compare venture-backed firms with large firms, which are, by their nature, less dynamic
(Davis, Haltiwanger and Schuh (1996)). A correct comparison should instead pit venturebacked against non-venture-backed start-ups. These studies, therefore, are unable to separate
the eects of venture capital financing from those of being a (naturally fast-growing) startup, and risk to capture eects due to a spurious correlation between being a start-up and
receiving venture capital. In other words, it could very well be that the purported vitality
of European venture-backed firms is due to factors other than venture capital. A deeper
analysis is therefore warranted, and our paper provides a first attempt in this direction.
We do so by looking at the involvement of venture capital with companies which listed
on Euro.nm between 1997 and 2000. Looking only at companies which make it to the stock
market has the obvious limitation of disregarding what happens to those which are still
private, or choose to remain so. However, in our case this limitation should not be too much
of a concern. Start-ups which go public are arguably among the most successful ones, since
the pecuniary and reputational rewards for founders and financiers are highest in this case.
Founders can get a much higher valuation with a flotation than with an acquisition or a
private placement. The ability to bring companies public is one of the key abilities venture
capitalists boast about with institutional investors, since IPOs are the most lucrative exit
from a venture investment, on average four or five times more profitable than acquisitions
(Gompers and Lerner (1997)). Since venture capitalists are profit-seeking organizations we
would expect them to bring as many of their portfolio companies public as possible, and since
they crucially rely on reputation for their business, we would also expect them to select the
most promising firms as investees. Therefore we might over-estimate the impact of venture
capital on corporate growth by looking only at listed companies, a possibility we will return
to in the interpretation of the data.
An advantage of looking at Euro.nm listed companies is that they belong to a small
number of high-tech industries, are of fairly similar age, and come from a small number of
countries. This makes them a relatively homogeneous group of venturable companies where
we naturally find a reliable control sample, avoiding sample design problems. Focusing on
Euro.nm listed companies also gives the advantage of obtaining detailed information thanks
to the tight disclosure requirements of Euro.nm, which makes companies disclose information
not only for the years starting with the IPO, but also for the three pre-IPO years. Such
breadth and depth of information can not be attained for private firms.

23

3.2.1

Euro.nm: Europes new stock markets

Euro.nm was created in the spring of 1997 as an alliance of the newly born new stock
markets of the stock exchanges of Amsterdam (Nieuwe Markt), Brussels (Euro.nm Brussels),
Frankfurt (Neuer Markt), and Paris (Nouveau Marche, which had opened in March 1996). In
June 1999, Milans Nuovo Mercato completed the ranks of the alliance. The stated purpose of
Euro.nm was to attract dynamic, innovative companies with high growth potential by oering
them suitable admission and trading rules, along the lines of what Nasdaq does in the US
(Euro.nm (1999)). Euro.nm oered admission criteria and listing requirements appropriate
for young companies with bright prospects but no established track record, willing to accept
tight disclosure rules in order to attract investors (see Box 3).
Box 3: Euro.nm admission and listing criteria
Shareholder equity (pre-IPO): at least 1.5 million euros
Age: at least three years (waiveable)
IPO volume: at least 5 million euros and 100,000 shares. At least half of the
IPO volume must come from a capital increase

IPO prospectus according to international standards

Lock-up: existing shareholders must lock-up their holdings for at least 12
months after the IPO (6 months on the Neuer Markt)

Free float: at least 20% of the nominal capital must be floated

Only ordinary shares with no restrictions to negotiability can be floated
At least one sponsor (an investment bank regulated by the stock exchange)
must be designated by the firm to coordinate the listing process

Timely release of annual and quarterly reports and of price sensitive information

The listing rules of Euro.nm were less restrictive than those in use for traditional exchanges, and thus more appropriate for dynamic new ventures. However, listing on Euro.nm
was more demanding than listing on a traditional exchange in terms of disclosure require-

24

ments. The Neuer Markt, which adopted the strictest rules, required prospectuses and annual reports to be published also in English, acceptance of the German Takeover Code, and
compliance with international accounting standards (IAS or US-GAAP). Euro.nm closed in
December 2000 after the merger of the Paris, Amsterdam, and Brussels stock exchanges into
Euronext, but its constituent markets have continued their activity independently. In Bottazzi and Da Rin (2001) we analyse the evolution of Euro.nm and provide an assessment of
its contribution to the financing of European innovative firms. Tables 7 and 8 provide an
overview of the structure and evolution of Euro.nm in terms of total number of listings and
funds raised.

Table 7. Euro.nm summary statistics

Number of IPOs
(of which in the data set)
Total capital raised
Capital raised at IPO

Nouveau

Neuer

Nieuwe

Euro.NM

Nuovo

Euro.nm

Marche

Markt

Markt

Brussels

Mercato

567

165

333

15

15

39

(511)

(157)

(306)

(6)

(6)

(36)

41,618

7,986

26,673

470

225

4,633

29.4

10.1

38.2

5.7

8.1

44.0

Notes: The number of IPOs includes 16 financial companies which we exclude from our data set.
Capital raised in millions of euros. Capital raised at IPO: median values.
Source: Authors calculations.

More than half of the IPOs occurred on the Neuer Markt, almost a third on the Nouveau
Marche, while the Nuovo Mercato attracted almost as many companies as the Neuer Markt
in its first eighteen months. Our sample closely replicates the market composition of the
population, apart for the two smaller marketswhich are under-represented. Notice that the
Neuer Markt accounts for a larger share of capital raised than of listed companies. Therefore,
the (median) amount of capital raised at IPO is far larger on the Neuer Markt than elsewhere.9
Table 8 summarises the evolution of IPOs on Euro.nm. It is worth noticing that IPOs on
the Belgian and Dutch markets has tapered o with time, and that the Neuer Markt shows a
robust and uninterrupted growth pattern, unlike the uneven growth of the Nouveau Marche.

The large amount of capital raised on the Nuovo Mercato is due to a small number of very large telecom
companies.

25

Table 8. Number of IPOs on Euro.nm

Nouveau

Neuer

Nieuwe

Euro.NM

Nuovo

Euro.nm

Marche

Markt

Markt

Brussels

Mercato

1996

18

18

1997

44

20

17

1998

103

43

46

1999

182

32

138

2000

220

52

132

33

Total

567

165

333

15

15

39

Source: Authors calculations.

3.2.2

The data set

We develop a unique, hand collected data set with information from the listing prospectuses
and annual reports of companies which went public on Euro.nm since its inception to December 2000. We obtained the listing prospectuses and annual reports in several ways. Whenever
possible, we downloaded electronic copies from the company (or stock exchange) web site.
For prospectuses which were not electronically available, which was often the case for earlier
years, we contacted the issuing company by phone, fax, or e-mail. In some cases we photocopied the documents at the relevant stock exchange. Overall, we collected 527 prospectuses
out of 567 IPOs which took place in the sample period, or 92% of the total. We also collected
1,790 annual reports, about 94% of the total.
Listing prospectuses are valuable for studying the role of venture capital in innovative
companies because they contain detailed information on the financial and business situation
of the company. Such information is not confined to the IPO year, but extends back in
time, up to the three previous years. We use prospectuses and annual reports also to derive
quantitative information on several financial and business variables. For each company we
collect all the available data for pre-IPO years from the issuing prospectus, which usually
contains data for the preceding three years. We also collect data for all the available post-IPO
years from annual reports. Each company in the data set is assigned to a sector through a
procedure we describe in the Data Appendix, which also contains a detailed description of the
data collection process and a list of the variables we use in this study and of their definition.
Our final data set, which does not include sixteen companies in financial services, consists of

26

511 companies.10
Finally, we collect data about financing from venture capitalists and their involvement
with these companies. We put particular care in extracting relevant information from our
sources. This turned out to be an extremely time-consuming task which required careful
search of each single prospectus and cross-checks with several other sources.11 The process of
identification of venture capitalist was made particularly dicult by the fact that, unlike for
banks, no standard identification criterion is available. We were able to collect data on the
extent of ownership and on the timing of venture capital financing, while the exact amount of
funding generally remains undisclosed. The details on the construction of the venture capital
data set can be found in the Data Appendix.
3.2.3

Venture-backed companies on Euro.nm

The first question one wants to ask is what was the actual involvement of venture capital
with companies listed on Euro.nm. The answer is that venture-backed companies constitute
a substantial part of Europes new public companies: The first two rows of Table 9 show
that nearly 40% of the listed companies were backed by at least one venture capitalist.
This proportion is higher for companies listed on the Nouveau Marche than for those listed
elsewhere. The proportion of listed companies which receive venture finance has doubled
since the opening of Euro.nm, a trend which is most noticeable in Germany, a fact we will
return to. Notice also that no company listed in Amsterdam or Brussels was backed by a
venture capitalist. This is at odds with the numbers in Table 3, where these two countries
were shown to have a relatively high venture capital intensity. One possible explanation is
the long tradition of listing on Nasdaq of Dutch companies (Blass and Yafeh (2000)), which
might be helped by venture capitalists to go through a more expensive listing in the more
established American market. Ease of access to Nasdaq could also explain the overall dismal
performance of the Nieuwe Markt. More dicult to explain is instead the lack of venturebacked companies on Euro.nm Belgium, and a Parisian dominance cannot be invoked: only
one Belgian companies is found on the Nouveau Marche.

10

Companies in the financial services sector are not considered because their financial structure, funding
requirements and strategic behavior dier substantially from those of industrial and (non-financial) services
companies.
11
We are grateful to our research assistants for the enthusiasm they put in this demanding and tedious job.

27

Table 9. Venture capital and Euro.nm listed companies

Nouveau

Neuer

Nieuwe

Euro.NM

Nuovo

Euro.nm

Marche

Markt

Markt

Brussels

Mercato

Without VC

292

68

186

26

With VC

219

89

120

10

VC before Euro.nm

67

27

34

VC after Euro.nm

130

41

86

(VC entry date unknown)

22

21

Notes: With (without) VC identify companies which received (did not receive) venture capital financing. Before (after) Euro.nm identifies companies which received venture capital financing before
(after) the opening of the new market they list on. The last row lists companies for which we could
not ascertain the date of venture capital financing.
Source: Authors calculations.

3.2.4

Venture capital and Euro.nm listed companies

We then want to know the extent to which European venture capital has been involved with
listed companies. Table 10 documents that the involvement of European venture capitalists
with Euro.nm has been substantial. We look at the number of venture capital firms financing
companies listed on Euro.nm. In the second column we list the number of venture capitalists
firms, and in the third those which also finance at least one listed company. The first row
shows the total number of EVCA members, plus the members of the French, German, or
Italian venture capital associations which are not also EVCA members. The other three rows
show the number of national association members, which includes both EVCA members and
members of the national association only. These constitute the largest sets of professional
venture capitalists we could identify at the European or national level. Nearly one third of
the core group of European venture capital firm was involved with companies which listed
on Euro.nm. This represents a substantial involvement, given that about 70% of Europes
venture capital firms have been members of EVCA since less than three years and therefore
may not have had enough time to take investee companies to the stock market. The lower
proportion recorded at the national level is due to the fact that a small number of venture
capitalists with international reach (often US or UK based) finance a very large number of
companies. These are European but not French, German, or Italian association members.

28

Table WA-2 in the Web Appendix shows that the sectoral composition of venture capital
investments is very close to the sectoral structure of Euro.nm, except for a slightly lower
involvement with Media & Entertainment and a higher involvement with Biomed.

Table 10. Venture capital firms and Euro.nm

Venture capital

of which:

firms

financing a listed company

European

601

172

German

152

42

French

153

40

Italian

73

Notes: European venture capital firms are members of the European Venture Capital Association
(EVCA) and of national venture capital associations. German, French and Italian venture capital
firms are members of the respective national venture capital associations (and possibly also of EVCA).
Source: Authors calculations.

Figure 3 examines the distribution of venture capital investments. It plots the number of
venture capital firms which finance 1, 2-4, 5-9, or more than ten listed companies. Only 24
venture capitalists (out of 172) finance more than five companies, and only eight more than
ten. This reflects the fact that many European venture capital firms are still very young,
and have not had the time to get many companies public. Information in the Web Appendix
shows that it is the larger venture capitalist with an international presence who tend to
support the largest number of listed companies.
Figure 3 about here
Figure 4 looks at the other side of the coin, namely the number of venture capital investors
by company. It shows that syndication of venture investments is not very common in Europe,
unlike in the US (Lerner (1994b)): More than half of the 219 venture-backed companies only
had one venture capitalist.
Figure 4 about here
Another way to look at the involvement of venture capitalists with listed companies is to
look at their equity holdings, which we examine in Table 11. While fairly volatile, holdings
are far from negligible. Moreover, these numbers are likely to under-estimate the involvement

29

of venture capital, since in many case bridge financing from specialised intermediaries is used
in the wake of the IPO to increase the equity base. Venture capitalists often sell part of their
stakes at this stage, but we are not able to see these transactions. The table also show that
at the time of going public, venture capitalists sell only about 40% of their holdings, and
remain involved with the company after it has gone public. As a comparison, Barry et al.
(1990) find that US venture capital firms had a higher average pre-IPO equity stake (32%)
and sold about a third of it. European venture capital thus seem to have lower shareholdings.

Table 11. Equity holdings by venture capital firms

Pre-IPO

Post-IPO

Mean

St.Dev.

Min

Max

Mean

St.Dev.

Min

Max

Neuer Markt

10

17

100

43

Nouveau Marche

14

18

85

12

53

14

46

32

Nuovo Mercato
Source: Authors calculations.

Our last piece of information comes from Table 12, which lists the nationality of venture
capital firms and investee companies. Reported numbers are counts of investments by venture
capital firms (row) in a certain country (column). One would expect venture capitalist to
invest in firms geographically close to them, given their need for constant interaction with
their investees. Several studies based on US data document the fact that venture capitalists
tend to invest in the proximity of their headquarters (Lerner (1995)). The table confirms that
this is the case for our sample, as the vast majority of investments is made within a venture
capitalists own national borders, as one can see by looking at the diagonal in the table. The
only seeming exception is represented by venture capital firms with an international reach,
and American venture capitalists which invest in Europe. But this impression is deceptive,
since both categories possess local oces in several countries.

30

Table 12. Venture capital and investee companies, by nationality

Investee companies
Venture Capitalists

Germany

France

Italy

Israel

US

Others

134

France

139

Italy

10

Israel

US

11

International

44

32

UK

Others

Germany

Notes: Others includes venture capitalists from Austria (5 investments), Denmark (1), Ireland (1),
Netherlands (8), South Korea (1), Switzerland (5).
Source: Authors calculations.

3.2.5

Which companies are venture-backed?

Before proceeding to the analysis of the eects of venture capital we want to know which
characteristics of a firm are associated with receiving venture capital financing. Theory
predicts venture capital to be associated with young, innovative companies that, being at
an early stage of development, are characterised by low profitability and a small amount of
sales.12 We have seen in Table 2 that European venture capitalists have been increasing their
early stages investment. Therefore we expect our findings to conform to the predictions of
the theory.
We estimate a probit regression in which the dependent variable is a dummy variable
that takes value one if a company has obtained venture capital financing. The independent
variables are measured before the arrival of the first venture capitalist (preVC).13
Unfortunately we cannot use in this analysis all the companies in the data set, since
there are some missing observations, and since 30 companies, i.e. 14% of the venture-backed
12
We are not aware of any statistical study of the determinants of venture financing for the US, except for
Hellmann and Puri (2000), who look at a sample of venture-backed start-ups and find that those which pursue
more radical innovations are more likely to attract venture capital.
13
For non venture-backed firms, we use the average of the pre-IPO values. We also experimented with
alternative measures, such as measuring variables in the years before the average date of entry of venture
capital in venture-backed companies, but we found no substantial dierence in the results. Hence we stick to
the simpler pre-IPO measure.

31

companies in our sample, have received venture capital funding before they started reporting
accounting information. Still, this leaves us with 359 companies.
Table 13 reports the probit regression results. We find that sales negatively aect the
probability of obtaining venture capital financing, while leverage has a positive eect, although it is not statistically significant. We control for sectors of activity, but these are
found to have no eect.

Table 13. Probit regressiondependent variable venture capital

Independent
Variables
Sales(preVC)
Leverage(preVC)

Marginal increase

Log likelihood

z-statistic

in probability
- 0.003

-0.01

0.117

0.34

1.482

-0.45

-1.131

Constant
Number of obs.

Coecient
***

-2.651

349
-184.82

W ald2 (7)

19.74

P-value

0.006

Notes: preVC denotes variables measured before the arrival of a venture capitalist. Significance
levels are indicated by * (10%), ** (5%), and *** (1%). Huber-White corrected standard errors are
used to obtain robust estimates.

Our findings are consistent with a view of venture capital getting involved with firms
which are still at a very initial stage of development and are therefore not yet able to sell: A
marginal increase in sales decreases the likelihood of receiving venture financing by 0.3%, an
economically small but statistically highly significant result. The positive eect of leverage is
consistent with a view of venture capital as an important source of financing. In other words,
the hard side of venture capital goes well along its soft side.
Alternative (unreported) specifications have considered the level of debt, its maturity, the
amount of assets and a national market eect as possible determinants of venture financing.14
We have done so to check if companies whose debt is mostly short-term might be more credit
14

The national eect is measured through dummies which take value one for companies listed in France,
Belgium, Italy, and the Netherlands. As in all other regressions, the latter three never turn out to be significant,
also due the low number of observations.

32

constrained and might therefore look more aggressively for venture financing. A dummy that
takes care of the national eect was also used to capture the higher proportion of French
venture-backed companies. All these variables turn out to be statistically insignificant, and
in all specifications the quality of the fit worsens.
We also expect venture capital to be involved with more highly innovative companies. To
check for this prediction we control for the natural proxy for innovativeness, R&D intensity,
measured as the ratio of R&D to assets.15 This reduces the number of observations to 101,
since few companies disclose R&D expenditure. The reported R&D figures are however reliable, since they are voluntarily disclosed in the IPO prospectuses as a signal of the companys
quality and are not a legally required item of the accounts. All the tables with the results of
our statistical analysis where we control for R&D can be found in the Web Appendix. We find
that a higher R&D intensity makes a company less likely to receive venture capital financing
(see Table WA-4 in the Web Appendix), but the result is not statistically significant. The
amount of sales remains the driving force behind obtaining venture financing, and industry
controls are all significant.16

3.3

The impact of Euro.nm on venture capital

We conclude our statistical portrait of venture capital in Europe by taking a dynamic view of
its involvement with the new stock markets. A close inspection of the listing data reveals in
fact that something is changing in the involvement of venture capital with listed companies.
We have seen in Table 6 that venture firms are growing fast in Europe. This is good news, for
at least two reasons. One is that numerosity is a sign of maturity. The second is that a large
part of Europes venture capitalist are what the jargon defines captives, i.e. subsidiaries of
industrial companies or financial institutions (typically banks). Captives are not the most
aggressive among venture capitalists (Hellmann, Lindsey and Puri (1999)). An important
change seems however to be taking place, with a new breed of US-style, independent, venture
capital firms entering the market and possibly changing the way venture capital operates in
Europe.
Table 9 above shows a suggestive piece of information in this respect. Of the 197 venture15

Our results do not vary if we control for R&D expenditure.

The finding that R&D has a negative (albeit statistically weak) eect is only apparently at odds with the
theory, however, since we are measuring variables before the arrival of the venture capitalist. The result is in
fact consistent with venture capital selecting companies at an early stage of development, when R&D intensity
is still low. However, one could conceivably think of alternative interpretations, for example that companies
whose R&D intensity is higher are less credit constrained and therefore less likely to look for venture financing.
16

33

backed firms in our sample for which we could identify the entry date of a venture capitalist,
two thirds received venture financing after the opening of Euro.nm. Interestingly, this proportion is higher in Germany, whose Neuer Markt is considered the most dynamic of the
new markets. Table 14 provides further evidence that Euro.nm may really be having an
eect on the European venture capital industry. Here we define a start-up as venture-backed
(VC-backed) if it receives venture finances within six months from its foundation. These
are arguably the companies where a venture capitalist has most chances to use its soft side:
It is much easier to aect strategy and management in a new firm than in a five years old
one. There are 50 VC-backed start-ups, which we divide into those which were born before
the opening of Euro.nm (pre-Euro.nm, 20 companies) and those which were born after it
(post-Euro.nm, 30 companies). The number of VC-backed start-ups clearly increases after
the opening of Euro.nm. We take this evidence as a suggestive indication of the positive effect of Euro.nm on venture capital. We also notice dierences across markets, as the positive
eect seems to be much stronger in France than in Germany or Italy. No venture-backed
companies are listed in Amsterdam and Brussels.

Table 14. Cohorts of venture-backed companies

Born VC-backed
Total
Neuer Markt

pre-Euro.nm

post-Euro.nm

120

31

16

15

Nouveau Marche

89

18

15

Nuovo Mercato

10

Source: Authors calculations.

Table 15 further refines this evidence. We count all venture-backed start-ups and partition
them by the year of listing on Euro.nm. The relative figures can be read in the second column
of the table. Then, in the third column, we count those venture-backed companies which were
also born such. This way we can measure how many companies were created with the help of
a venture capitalist. Several things are worth noticing. First, the number of venture-backed
start-ups, whether born such or not, increases over time. In particular, the number of born
venture-backed start-ups more than doubles each year. Moreover, the proportion of venturebacked companies which are born such doubles in 2000. Our data set also shows that six of
the 28 companies which were born venture-backed in 2000 had a young venture capitalist,

34

i.e. one which had become a member of EVCA at most two years earlier. Between 1996 and
1999 only two such cases had occurred. Overall, these figures suggest a picture of increasing
involvement of European venture capitalists with companies which have the potential to list,
and an increasing importance of venture capitalists in the creation of innovative start-ups.

Table 15. Euro.nm and new venture-backed companies

VC-backed

born VC-backed

1996

1997

12

1998

35

1999

72

12

2000

93

28

Total

219

50

Source: Authors calculations.

There are good reasons to greet this evidence with optimism and hope. Several studies
have recently analyzed the relationship between venture capital and stock markets. Black
and Gilson (1998), for instance, oer a conceptual framework for analyzing the interplay
between venture capital and capital markets, while Michelacci and Suarez (2000) develop
an elegant formalization of the link between business creation and equity markets. Both
studies emphasise the complementary role of stock exchanges and venture capital. In this
view, venture capital and stock exchanges are more than simple sources of finance. Venture capital contributes eective oversight of new ventures, selecting and supporting valiant
entrepreneurs and promising new ventures. Such support facilitates the growth of these ventures and accelerates their arrival to equity markets. In turn, active and liquid stock markets
make IPOs aordable for companies and attractive for investors, creating a complementarity
similar to that modeled by Pagano (1993). The American experience with Nasdaq, which was
created in 1971 to provide an equity market for high-tech companies, is certainly suggestive
in this respect. Over the 1990s about 6,500 companies listed on Nasdaq, the American stock
exchange focussed on high-technology industries which in December 2000 listed over 6,000
companies with a capitalization above five billion dollars. Many of these companies had been
backed by venture capital, among them successful ones such as Amazon, Cisco Systems, Dell
Computers, Intel, Microsoft, and Yahoo!. The evidence we provide in this paper will show
that for Europe this road is still very long, but we are probably moving in the right direction.

35

Venture capital and the financing of European innovative

companies

We now turn to the core of our analysis. Our goal is to provide a rigorous assessment of
whether European venture capital helps select and nurture the most dynamic innovative
companies, so as to provide guidance for informed policy. In Section 2.3 we have seen that
venture capital is expected to provide valuable support to investee companies, and that it is
indeed found to do so in the US. Does European venture capital also provide the companies it
finances with hard and soft support able to make them the superstars among innovators?

4.1

Null and Alternative Hypotheses

We start by setting forth our conjectures on the eects of venture capital financing on the
following key aspects of corporate evolution:
The timing of the listing decision. This decision is a crucial one in the life of an
innovative company. Going public helps future growth and financially rewards financiers

and founders. Our first null hypothesis is that venture capital does not play any role
on the process of going public, i.e. that venture capital neither speeds up nor slows
down the IPO process. There are at least two alternative hypotheses. The first is that
venture capitalists speed up the decision to go public. This would be the case if venture
capitalists invested to reap a capital gain and therefore push for a quick IPO to cash in
and turn to new ventures, or if they enabled companies to mature faster. NVCA (1988)
indeed claims that, between 1992 and 1996, US venture-backed companies were 70%
more likely to become listed than other start-ups. Alternatively, venture capital might
lengthen time-to-listing (TTL) because it invests in younger firms and waits for them to
mature. In this case a venture capitalist, by ensuring adequate financing, would bring
a company public only when its potential has been fully brought out, or when the cycle
in the IPO market may ensure a high valuation of the company.
The amount of funds raised at IPO. The amount of capital raised is important to deter-

mine the amount of resources a growth-oriented company can rely on for its investments.
Our second null hypothesis is that venture capital does not aect the amount raised at

IPO. There are at least two alternative hypotheses. First, certification from a venture
capitalist may reassure investors even when financial results do not still reflect the full
potential of the company. In this case venture capital would increase the amount raised,

36

which would also be the case were venture capitalists patient enough to wait for a hot
IPO market. But if venture capital pushed firms to the market, its eagerness to exit
quickly could be detrimental for the amount of funds raised, both because investors
would be suspicious of venture-backed companies and because the IPO might happen
during a cold market.
The post-IPO corporate growth, measured by sales and employees. Our third null hy-

pothesis postulates that the post-IPO growth of a listed company is venture capital
neutral, i.e. that is there is no relation between the post-IPO growth and the presence
of a venture capitalist. Venture capitalists might indeed be attracted by the innovativeness of a firms, which could be unrelated to employment or sales. We take the IPO as a
turning point in the life of these companies, because it provides them with the financial

resources necessary to fully unfold their business potential. Again we have some plausible alternative hypotheses. The first alternative is that venture capital favors sales
and employment growth through its ability to connect the firm with potential clients
and suppliers and to attract addition funding. NVCA (1998) claims that US venturebacked companies created jobs at a 55% faster pace than other start-ups between 1992
and 1996, and Brav and Gompers (1997) find them to yield higher stock returns in the
five years after listing. If that were indeed the case we would have a very nice piece
of evidence to support the presumption of a positive macroeconomic eect of venture
capital. An opposite alternative would see venture capital as detrimental to growth if
its main goal is to realize a quick and dirty capital gain at IPO and then leave the
company to its own fate.

4.2

Evidence on the timing of the IPO

In this section we test the eect of venture capital on a crucial strategic decisions of Euro.nm
listed companies: When to go public. To explore this issue we compute a variable, time-tolisting (TTL), defined as the amount of time elapsed from a companys foundation to the date
of its IPO. For companies born before the creation of Euro.nm we must take into account
that they could not access stock markets until Euro.nm was open. For these companies, that
represent 80% of our sample, we compute TTL as the dierence between the calendar date at
which a company went public and the date at which the new market it lists on was created,
a date which diers across countries. The model we test can be written as:
TTL = f(leverage, ROA, age, venture capital)

37

where we measure financial variables at IPO and control for country and sector of activity.
We use a parsimonious semi-parametric model for the analysis of the timing of that decision,
i.e. a Cox proportional hazard model (see Kiefer (1988)), which we can write as:
n 0 o
h(t) = h0 (t) exp X

where h(t) is the hazard rate that measures the risk of the event go public happening at
every instant, which depends on some independent variables Xi , while h0 (t), the baseline
hazard function, measures the risk of going public were all Xi equal to zero.
The Cox proportional hazard model has the notable advantage of not imposing any restriction on the baseline hazard rate h0 (t) in providing estimates of the coecients , since
we are interested in estimating the hazard ratio. Let us define the risk set Ri as the set of
firms which may decide to go public at time ti . The hazard ratio is the probability that firm
i goes public at time ti , conditional on the same firm being in the risk set at ti :

n 0 o
exp Xi

jRi

exp { 0 Xj }

If all firms were the same, the hazard ratio would be equal to the number of firms gone public
in an interval of time divided by the number of firms who were at risk of going public in the
same period. Firms, however, are not the same. They dier with respect to the explanatory
variables Xi which aect the probability of going public. If a unit increase of an independent
variable aects the hazard ratio by increasing its value above one, we infer that the eect of
the variable is to increase the probability, or risk, of the event go public on Euro.nm.
Table 16 reports the hazard ratio estimates, which are obtained using robust standard
errors. We look at the eect of venture capital, controlling for the return on asset (ROA) and
for leverage, both measured at IPO, for sectors of activity, and for country dummies. As in
the other regressions, we also try a dierent specification which uses the venture capitalists
shareholdings size as a measure of their influence. Since in all cases we find no significant
dierence in the results obtained, we report the simpler dummy specification. Finally, we
control for age at IPO since this variable might introduce a bias as firms diers in their
stage of maturity at the time of the creation of Euro.nm. In other words, older firm may be
readier for going public than newborns. We take care of this possibility by controlling for the
age of the firms at the creation of the new markets through a variable which interacts the
companys age with the calendar year of its listing.

38

Venture capital turns out to have little eect on TTL: The hazard ratio is 1.05, meaning
that venture capital increases TTL, but it is not significant. Also ROA and leverage do not
significantly aect TTL. The age of the company at the creation of the new markets is instead
always statistically significant, but it leaves the hazard ratio virtually unchanged. Companies
listed on the Nouveau Marche have a TTL which is about 60% longer than elsewhere. Finally,
companies in all sectors of activity, except the traditional one, have a hazard ratio which is
close to 0.3 and highly significant.

Table 16. Cox regressiondependent variable timetolisting

Independent variables

Hazard ratio

t-statistic

Venture capital

1.05

0.61

Leverage(atIPO)

0.89

-0.48

ROA(atIPO)

1.00

0.18

France

0.36

***

-8.71

Age*97

1.00

***

7.32

Age*98

1.01

***

8.24

Age*99

1.00

1.60

Age*100

0.99

***

Number of obs.

488

Log likelihood

-6.37

-2,460.57

W ald2 (13)

233.67

P-value

0.00

Notes: All variables are measured at IPO. Age times year is the age of the company interacted with
a dummy for year of listing. Significance levels are indicated by * (10%), ** (5%), and *** (1%).
Huber-White corrected standard errors are used to obtain robust estimates.

When we control for R&D expenditure as a way to focus on the most innovative companies
in our sample, we confirm these results, except that now venture financing increases TTL,
albeit still without statistical significance, casting some doubts on the robustness of our
previous estimates (see Table WA-5 in the Web Appendix).

4.3

Evidence on the amount of funds raised

We know that an important role of venture capital is the provision of financing. Does this also
imply that venture-backed companies are able to raise more money from the public markets?

39

To answer this question we collect information on the amount of funds that companies raise
at IPO and we try to understand whether venture capital influences it.
Table 17 reports the results from our regression, which employs robust standard errors.
Given the high variability of our data we choose an estimation method that performs an initial
screening and eliminates gross outliers and performs the regression iteratively, weighting the
observations by absolute residuals.17
The dependent variable is the amount of funds raised. Given the high variation in firm
size, which arguably influences how much capital a company can raise, we normalise it by
dividing it by assets (measured at IPO). We use assets and not sales because the latter would
be a poor measure of the size of these innovative companies, which still need time and money
to invest to fully express their commercial potential. Sales, instead, may be a good measure
of the extent to which an innovative company has matured. We then use sales (divided by
assets) as a regressor, along with the presence of a venture capitalist, the return on asset
(ROA), leverage, and age, all measured at the time of the IPO. As in the previous regressions
we control for country and sectoral eects.

Table 17. Robust regressiondependent variable amount of funds raised

over assets
Independent variables

Coecient

t-statistic

Venture capital

0.633

***

2.411

Sales/Assets

0.096

***

3.465

Leverage(atIPO)

1.399

1.787

ROA(atIPO)

1.627

***

32.389

Age

-0.004

***

-3.650

France

-1.799

***

-6.104

2.984

***

3.714

Constant
Number of obs.

470

F (11, 458)

144.61

P-value

0.000

Notes: All variables measured at IPO. Significance levels are indicated by * (10%), ** (5%), and ***
(1%). Huber-White corrected standard errors are used to obtain robust estimates.
17

The method is based on Cooks D.

40

The results are interesting. Companies that have higher sales (over assets), and therefore
are probably more mature, are able to raise a higher amount at IPO: An increase of 10%
of sales (over assets) brings an additional 1% increase in the amount raised (over assets).
A similar result holds for companies whose ROA and leverage are higher: A 10% increase
in either of these ratios carries an increase of 16% and 14%, respectively, in the amount of
funds raised (over assets). Companies listed on the Nouveau March`e are characterized by
a markedly lower ability to raise fundsthey raise about 180% less than other companies.
Older companies also raise less capital, but only marginally so. Venture capital has a positive
and significant role: venture-backed companies raise on average 60% more than the others, a
result we will come back to. Sectors of activity are found to play no role.
When we control for the R&D intensity some of the above results change (see Table WA-6
in the Web Appendix). Sales (over assets) become only marginally significant and lose much
of their economic impact. Venture capital also becomes statistically insignificant, while the
negative eect of age and of France persists. Overall, these results refuse our null hypotheses
that venture capital has no influence on the dimension of the IPO, a results that is consistent
with the idea that the hard side of venture capital is very important.

4.4

Evidence on corporate growth

We now examine how venture capital aects corporate growth. A first piece of evidence comes
from a systematic comparison of how venture-backed and non venture-backed companies
behave. Table 18 reports the results of two tests.
A Wilcoxon test looks at the dierence in the medians of several variables pre- and postIPO, where pre- and post-IPO are defined as the periods of (up to) three years before and
after the IPO. We run this test for both venture-backed and non venture-backed companies. A
Kruskal-Wallis sign-rank test looks instead at whether the medians of several variables dier
in statistically significant manner between venture-backed and non venture-backed companies, within the pre- and the post-IPO periods. Table WA-3 in the Web Appendix reports
descriptive statistics for all reported variables, so as to facilitate comparisons of pre and
post values. Bold figures in Table 18 show, those median values which dier significantly
across time and within the venture-backed and not venture-backed groups of companies. Underlined figures show instead, within the pre- and post-IPO periods, those median values
which are statistically significantly dierent between the two types of company.
Lets concentrate first on how variables dier across time. Here we find that virtually all

41

variables vary significantly, with the only notable exception of profitability for venture-backed
companies. This results confirms that listed companies do invest and grow substantially after
the IPO, and that this does represent a turning point of their evolution.
Things become more varied when we look at dierences between venture-backed and
non venture-backed companies. Before the IPO venture and non venture-backed companies
do not dier systematically. We find statistically significant dierences in three variables:
profitability and sales, both of which are lower for venture-backed companies, and R&D
intensity, which is instead higher (as one would expect from our probit estimate). After
the IPO, non venture capital firms become significantly bigger in terms of assets, debt and
equity, although both types of companies show the same level of leverage. We also find a
systematic dierence between venture-backed and non venture-backed companies in terms of
sales (which we interpret as a sign of maturity), employees, capital expenditure, intangible
assetsventure capital being linked to lower values.

42

Table 18. Venture capital and corporate growth

Assets
Debt
Equity
EBITDA
Leverage
ROA
Sales
Employees
Capex
Foreign sales (%)
Intangible assets
R&D
R&D intensity

Pre-IPO

Post-IPO

no VC

7.1

59.3

VC

6.2

42.8

no VC

4.7

18.1

VC

3.5

11.5

no VC

1.2

35.6

VC

0.9

24.5

no VC

0.8

3.2

VC

0.2

0.4

no VC

0.8

0.3

VC

0.8

0.3

no VC

0.11

0.07

VC

0.05

0.01

no VC

9.3

36.4

VC

5.6

22.9

no VC

77

210

VC

54

170

no VC

0.6

7.0

VC

0.4

4.9

no VC

0.01

0.00

VC

0.03

0.01

no VC

0.2

8.0

VC

0.2

4.0

no VC

0.8

3.3

VC

0.8

3.4

no VC

0.1

0.05

VC

0.2

0.06

Notes: For each variable we report the average of its median values for the (up to) three years before
(Pre-IPO) or after (Post-IPO) the IPO. In the upper row we report the medians for non venture-backed
companies (no VC), in the lower row those for venture-backed companies (VC). Bold values indicate
a statistically significant (at 5% confidence level) dierence of medians across time. Underlined values
indicated statistically significant (at 5% confidence level) dierences between venture-backed and non
venture-backed companies. Source: Authors calculations.

43

Although the analysis of Table 18 is suggestive, it can not be considered conclusive. We

need to control for other characteristics of the firms in order to ascertain the true impact
of venture capital financing on corporate growth. We thus turn to a more formal analysis,
where we look at the eect of venture backing on the growth of employment and sales after
the IPO.
The model we have in mind is very simple: the capacity of an innovative firm to grow is a
positive function of its ability to invest, which can be financed either from revenues or from
external finance (debt or equity). Age, an indicator of the stage of corporate development,
is also relevant since we expect younger companies to grow faster. We therefore estimate the
following model:
employment (sales) growth = f(ROA, leverage, age, foreign sales, venture capital)
and we control for country and sector of activity. As before, we adopt an estimation method
which eliminates gross outliers and employs robust standard errors. Notice that we add a new
dummy, whose value is one when a company declares in the IPO prospectus its willingness to
expand the market for its products outside of the domestic domain. We believe the willingness
to export to be a characteristics of more dynamic companies, since expanding beyond ones
natural realm requires the ability to sell truly innovative products and services.
In Table 19 we report our results. The dependent variable is the growth of employment
in the period of (up to) three years after the IPO. Note that the dimension of our data set
decreases both because not all companies report employment data and because we cannot
compute post-IPO employment growth for companies which went public in 2000. We are
then left with 270 observations.
The results confirm our intuition. Relatively older companies and those whose return
on asset (ROA) and leverage are higher, increase their employment most. Leverage, in
particular, is not only statistically but also economically significant: A 1% increase in leverage
means a company creates 121 jobs in the post-IPO period. Companies listed on the Nouveau
Marche experience a decrease of 51 units in employment, while the foreign sales dummy has
a statistically insignificant eect. Venture capital plays no role, as it implies a slight decrease
in employment, which is however statistically insignificant.18 Sectors of activity are also not
significant.
18

In alternative, unreported, specifications we control for capital expenditure, the level of debt (relative to
asset) and its maturity, but this worsens the statistical significance of individual variables and of the regression.

44

Table 19. Robust regressiondependent variable employment growth

Independent variable

Coecient

t-statistic

Venture capital

-8.93

-0.548

ROA(atIPO)

16.56

***

2.375

121.48

***

2.623

Leverage(atIPO)
Foreign sales

10.58

Age

0.10

France

-51.47

Constant

50.35

Number of obs.

270

F (11, 258)

3.90

P-value

0.695
*
***

1.836
-2.602
1.055

0.000

Notes: All independent variables measured at the time of the IPO. Significance levels are indicated
by * (10%), ** (5%), and *** (1%). Huber-White corrected standard errors are used to obtain robust
estimates.

We then control for R&D expenditure (at IPO), as reported in Table WA-7 in the Web
Appendix, where our sample almost halves. To avoid an issue of simultaneity and of reverse
causality we control for R&D at IPO. Since R&D expenditure includes expenditure for labor
in R&D it is highly plausible that the latter variable is significant in explaining employment
growth. In fact this turns out to be the case: one million euros of additioinal R&D expenditure
creates an additional 11 jobs. Leverage and the France dummy remain significant and retain
(even increase) their size and sign, while ROA becomes insignificant. Interestingly, the foreign
sales dummy now becomes statistically significant, and negative: for companies with high
R&D expenditure the willingness to expand abroad is detrimental for employment growth.
Again, venture capital does not seems to be relevant and retains its negative eect on job
creation.
We finally turn to the post-IPO sales growth. Table 20 reports our estimates, which
are based on a sample of 316 companies. The results do not dier much from those for
employment growth. Older companies with a high ROA and leverage experience a higher
increase in sales: A 1% increase in ROA results in almost 8 millions of additional postIPO sales, and a similar increase in leverage creates 13 million euros of sales, albeit with
scant statistical significance. The new result is that the intention to expand their product

45

market in foreign countries does contribute to sales: Export-oriente companies enjoy almost
7 million euros more of revenue than purely domestic players. French companies significantly
grow less also in terms of sales: Their post-IPO turnover is almost 10 million euros lower
than elsewhere. Venture capital financing remains ineective: Venture-backed companies sell
almost 5 less millions than others, but the result is marginally statistically significant. Sectors
of activity continue to hold no eect.

Table 20. Robust regressiondependent variable sales growth

Independent variables

Coecient

t-statistic

-4.68

-1.542

Venture capital
ROA(atIPO)

7.73

Leverage(atIPO)

***

13.19

5.603
1.508

Foreign sales

6.80

**

2.302

Age

0.03

***

2.676

-10.05

***

-2.768

France
Constant

7.69

Number of obs.

316

F (11, 304)

6.63

P-value

0.870

0.000

Notes: All independent variables measured at the time of the IPO. Significance levels are indicated
by * (10%), ** (5%), and *** (1%). Huber-White corrected standard errors are used to obtain robust
estimates.

Controlling for R&D expenditure undertaken at IPO, we reduce the sample to 143 companies. Table WA-8 in the Web Appendix shows that R&D expenditure turns out to be
relevant again: R&D performing companies enjoy 2 million euros of sales more than non performing ones. Age and leverage retain their positive eect on sales, while ROA and France
become insignificant. The intriguing result is that venture capital does finally play a role:
Venture-backed companies decrease their sales by almost 8 million euros after IPO.
Before turning to an overall interpretation of these results and of their meaning for the role
of European venture capital, we need to tackle some limitations of our analysis. Our results
could indeed suer from two possible selection biases, on both observable and unobservable
variables. We thus turn to some robustness checks.

46

4.5

Robustness checks

In the previous sections we have tried to evaluate the impact of venture capital financing on
the companies listed on Euro.nm. The evaluation problem, as it is known in the econometric
literature, is the problem of correctly measuring the eect of a curesuch as a policy reform
or a training programon some variables (see Blundell and Costas Dias (2000)). The problem
in evaluating a cure is that both observable and unobservable variables may be present, which
might bias the estimates if not properly accounted for.
In our case the correct approach to assess the eect of venture capital (the cure) should
look at certain companies and compare their reaction when they do and when they do not
receive venture financing. Unfortunately this is not possible as our companies are either
venture-backed or non venture-backed, and receiving venture capital is not a random event.
The issue is then how to construct the right counterfactual.
In the impossibility of obtaining experimental data, dierent methods of evaluation have
been adopted by researchers. We consider two dierent methodologies. One approach is
known as the matching method, and mainly addresses the issue of bias due to incorrect
control for observable variables. The second approach is known as the dierence in dierences
method, and it is particularly useful in removing unobservable individual eects and common
macro eects. We thus re-evaluate the eect of venture capital assessing whether our previous
estimates are subject to these biases.
4.5.1

The matching method

What we have tried to measure in our analysis is the eect of being venture-backed on sales
and employment growth, on the amount raised at IPO, and on the time-to-listing. Denote
any of these variables with Y . The analysis then entails measuring the average eect ( ) of
venture capital on venture-backed companies:
i
i
/i V C) E(Ynvc
/iV C)
= E(Yvc

(1)

where the first element on the right hand side measures the expected value of vetnure capital
on variable Y conditional on company i being venture-backed, while the second term measures
the expected value of the same variable, were company i without venture capital. The problem
is that this last term is not observable: It is impossible to see the characteristics of venturebacked companies in the absence of venture capital. In other words we lack a proper control
sample. Being backed by venture capital is in fact not random, as we have observed when

47

we have estimated the probability of receiving venture financing. As a consequence, the

assignment process to venture capital might be determined by (observable) variables (Xi )
that potentially aect the outcome Y as well. If that eect turned out to be important, our
previous estimates might be biased and our conclusions flawed.
To exploit the information we get about Y from non venture-backed companies, that act as
our control sample, we assume that, conditional on Xi , the value of Y (time to listing (TTL),
amount raised at IPO, sales or employment growth) and the fact of being venture-backed are
independent. Under this assumption equation (1) can be re-written as:19
i
i
= E(Yvc
/i V C, Xi ) E(Ynvc
/iNV C, Xi )

(2)

We can now estimate equation (2) non parametrically. In order to correctly measure the
eect of venture capital we need to estimate the two terms on the right hand side of equation
(2), matching each venture-backed company with a non venture-backed company with the
same characteristics Xi . In other words, we need to find a way to compare observations with
similar Xi . Only in this case the dierent behavior of the two companies can be correctly
attributed solely to the presence of venture capital.
When Xi is high dimensional the estimation strategy may become unfeasible. Still, one
can resort to matching companies not on the values of Xi but on a function of Xi . We do this
through the propensity score method, which we illustrate in detail in the Web Appendix. We
then proceed to estimate the average eect of being venture-backed, taking into account that
by using the matching method we reduce the bias due to specification error but possibly at
the cost of losing eciency. In other words we could obtain estimates with a lower statistical
significance.
Table 21 reports the estimates obtained with this method for our four variables. The
estimated values of provide measures of the eect of venture capital dierent from those we
obtained in the previous sections. Venture capital is now found to slightly (but statistically
significantly) increase TTL. As regards the average eect of venture capital on the amount
raised at IPO the matching method suggests a negative eect, casting some doubts on the
positive eect of venture capital which we found in Table 17. However, this method confirms
our finding of a negative eect of venture financing on the post-IPO growth of sales and
employment. The standard errors of amount raised, employment and sales growth (but not
that ot TTL) in fact become considerably larger, but, as we observed, this is not surprising
19

This assumption is known in the literature as conditional independence.

48

for this type of estimates.

Overall, we conclude that the inference from our regression analysis may not be robust
to possible specification biases with respect to observable variables in the case of TTL and
amount raised. In the case of sales and employment growth, instead, we find reasons to
remain confident on the robustness of our findings.

Table 21. Nonparametric stratification estimates: Average eect of venture

capital

Time-to-listing

0.42

Amount raised (over assets)

t-ratio
***

5.276

-10.19

0.639

Employment growth

-21.478

0.434

Sales growth

-36.678

0.513

Notes: Significance levels are indicated by * (10%), ** (5%), and *** (1%).

4.5.2

The dierence in dierences method

Another popular method of evaluation is called dierence in dierences (DID), and is helpful
in addressing possible evaluation biases due to the eects of unobservable variables which
could be driving the dierence in behavior of the two groups we are trying to compare,
venture-backed and non venture-backed companies. The name of the DID estimator comes
indeed from the fact that it compares the dierence in the average behavior before and after
the IPO for the eligible group (venture-backed companies) with the behavior before and
after the IPO of the control group (non venture-backed companies). Notice that we compare
behaviour around the IPO since we need to pin down the eect of venture capital (the cure)
on how treated and untreated companies react to a common external shock (the IPO).
We can apply the DID estimator only in the case of employment and sales growth, since
time-to-listing and amount raised only occur at IPO. We indicate the estimator with DID ,
which measures the growth of venture-backed in excess to that of non venture-backed companies. Abstracting from any regressor besides venture capital indicator, we write:
C
C
DID = (YtV1 C YtV0 C ) (YtNV
YtNV
)
1
0

49

(3)

where Y V C and Y N V C are the mean values of the variables for the venture-backed and the
non venture-backed companies, respectively, and ta 0 and t1 represent the pre- and post-IPO
periods.
Under the assumptions of common time eects across groups and of no composition
changes within each group, DID measures the average eect of the IPO by removing the
unobservable individual eects and common macro eects. In fact, by dierentiating the mean
value of Y inside the brackets we eliminate the common individual eect without aecting
the common time eect, which can be eliminated by dierentiating the two brackets.
Table 22 shows the results of the DID estimator for the post-IPO growth in employment
and sales for the two groups of companies. Our estimated eects confirm the sign of the
coecient of our previous estimates, as well as that of the stratification estimator, although
both their value and their significance is now higher. There are two possible weaknesses of
the DID estimator. One is due to the lack of control for unobservable (temporary) individual
specific components that might influence the behavior of the two groups. The DID estimator
might then over-estimate the eect of the cure. This is a possible an explanation of the
higher values in Table 22 than in Table 21. A second weakness of the DID estimator is
that the assumption of common macro eect across companies. If the two groups have some
characteristics which distinguish them and make them react dierently to the common shock,
we may get inconsistent estimates.

Table 22. Dierence in dierences estimates: Average eect of venture

capital

Employment growth

-106.38

Sales growth

-127.18

t-statistic
*

-1.84
-1.08

Notes: Significance levels are indicated by * (10%), ** (5%), and *** (1%).

4.6

Venture capital in Europe: An assessment

We are now able to provide an initial assessment of the role of venture capital in Europe, and
of its ability to contribute to economic growth and job creation. We should consider several
elements in turn.
First, we have seen that European venture capital has grown substantially over the last
few years. The amount of money invested in innovative companies and the number of venture

50

capital firms have increased fast. Wide dierences remain across national economies, and the
gap with the United States is far from closing, but the European venture capital industry is
certainly expanding fast. This is hardly surprising, since the industry appears to be highly
profitable: The internal rate of return for three year old investments was in 2000 a hefty
29.2%, and that for ten year old ones a remarkable 15.6%, according to the European Venture
Capital Association (EVCA (2001)).
Second, we have documented that the involvement of venture capital with companies
listed on Europes new stock markets has become substantial, and might have started a
virtuous circle whereby easier exit through an IPO encourages venture investments, which
in turn nurture companies which can soon list and support the growth of stock markets.
Intriguingly, we have seen that the number of venture-backed listed companies which were
born with the financing of a venture capitalist increases year after year, as does its proportion
over all venture-backed firms.
Third, we have focused on the eect of venture capital on some of Europes most successful
innovative firms, those which made it to list on one of the new markets. Here we can apply
a more formal statistical analysis and sharpen our arguments. On the basis of the theoretical
literature, and of empirical studies of US venture-backed firms, we have explored the eect
of venture capital on the timing of the listing of investee companies, and on their ability to
raise funds at IPO, to generate revenue, and to create jobs. Venture capital appears to yield
uncertain influence on the timing of IPOs. We also find that it helps companies raise more
capital at IPO, but this result does not seem robust to possible biases in the analysis. From
this we conclude that the ability of venture capital to ease credit constraints in Europe is
very important but still confined to the earlier stages of a firms life, when financing may be
crucial for its very coming into existence. In fact, the number of venture-backed companies
has more than doubled after the opening of Euro.nm, reaching almost 10,000. It is suggestive
to compare this result with what Hellmann and Puri (2000) find for a sample of Silicon Valley
firms. They argue that that the role of venture capital in front of less radically innovative
companies is precisely the provision of funds at early stages, rather than speeding up their
maturation.
We also find that venture-backed companies do not generate more sales or create more
new jobs than others. On the contrary, when we restrict our sample to the more innovative
companies, those which perform R&D, the venture-backed ones appear to increase their sales
less than the others. Robustness checks to detect possible biases in our analysis confirm that
these findings are indeed robust, and that venture-backed companies are not the superstars

51

among those listed on Europes new stock marketsat least in terms of sales and employment growth. While we cannot eliminate all reasonable doubts on the possibility of selection
biases, the empirical evidence we uncover does support the idea that venture-backed listed
companies are not systematically dierent from non venture-backed companies, and that they
do not grow faster, either before or after the IPO.
We interpret this finding as suggesting that the role of venture capital in Europe is
somewhat dierent than in the United States. The provision of early stage financing, which
has grown very fast in the past three years, seems to be crucial to allow innovative start-ups
to overcome credit constraints, which are arguably tighter in the old continent. Whether the
lack of a systematic association with the most successful innovative companies is due to the
immaturity of European venture capital or to a lack of superstars among European firms
we cannot say at this stage.20
A sensible objection to our interpretation is that the unselective high valuation of companies listed on Euro.nm might have masked the true value of being venture-backed. This is a
fortunate time to look at this possibility, since stock valuation on Europes new stock markets
have fallen sharply since mid 2000. One may conjecture that the true value of venture-backed
companies would only show up once the market becomes more selective. While a thorough
analysis of the determinants of valuation goes well beyond the scope of this paper, we can
provide some telling information.
Figure 5 plots a simple (unweighted) stock price index of all the companies in our sample,
which we divide into venture-backed and non venture-backed ones. One can readily see that
there has been no systematic under-valuation of venture-backed companies, and that the
behaviour of the two indices is quite similar.21 Since our data go through June 2001, we
consider it unlikely that extremely high valuations of high-tech companies in the late 1990s
may have obscured the true value of being venture financed. On the contrary, this pattern
appears at first sight in contrast to the results of Brav and Gompers (1997), who find that
in the five years after going public venture-backed companies growth outperform similar
non-venture-backed companies.
20

One should also consider that venture capital firms are (successful, it seems) profit-driven organizations,
not public bodies. Hence, one may expect them to contribute to corporate growth and job creation only
inasmuch as this make them richer.
21
Moreover, the standard deviation of the index of venture-backed companies is about one and a half times
that of non venture-backed companies, i.e. the former are more volatile, suggesting more uncertainty on part
of investors. A rank-sign test accepts the hypothesis of equality of the medians of the two series, but not of
the variances.

52

Figure 5 about here

Another possible objection to our interpretation is that main role of venture capital is
to bring companies up to the levels required for listing, thus helping those which would
not be able to qualify for an IPO without external help. In this case, the value of venture
capital would result in high growth of investee companies after its arrival but before the IPO.
Unfortunately, the nature of our data set prevents us to test directly for this possibility, since
for the companies in our sample the time between the arrival of the venture capitalist and
the IPO is too short to allow any statistical analysis.22 However, indirect evidence suggests
that this conjecture may not hold to a closer scrutiny. First, the listing requirements of
Euro.nm do not constitute a tight barrier, and are in fact far from binding for most of the
companies which go public on Euro.nm. Second, the financial structure of listed companies
varies widely, so that not even de facto minimum standards seem to characterize these IPOs
(Bottazzi and Da Rin (2001). Finally, we find that firms which receive venture capital are
characterised by a low level of sales (see Table 13), but also that the sales and earnings of
venture-backed companies remain lower than those of non venture-backed firms in the three
years before IPO (see Table 18). This would not be the case if the main task of venture
capital were to bring investee companies to pass a hurdle or to reach the same performance
of more aggressive competitors.
While the nature of our data clearly makes it dicult to distill truly conclusive results,
ours is clearly a piooneering attempt and we have to make do with available data. For
instance, we cannot obvserve the instrinsic quality of investee companies, nor the actual behaviour of venture capitalits to assess if some of them may be more eective than others in
nurturing innovative businesses. Still, we believe that we have constructed a solid interpretation of what venture capital is presently doing in Europe, and that this hard evidence may
contribute to more informed policy decisions.

Conclusion

Venture capital is growing fast in Europe, and its influence on European entrepreneurial
firms is increasingly important. Without financing from venture capital many of todays
most dynamic start-ups could have never come into existence, and a non negligible number
of the companies which list on Europes new stock markets would probably never have made
22

The median time between the arrival of a venture capital and the IPO is only 16 months.

53

it. Venture capital is therefore understandably high on the policy agenda, both at EU and
national levels. The presumption is that venture-backed firms are particularly dynamic, and
able to create jobs and wealth. An eort to create suitable conditions for the development of
this form of financial intermediation then seems warranted.
We provide the first attempt at a rigorous assessment of this policy stance. We ask
ourselves what role does venture capital really play in Europe. We find that the industry is
expanding fast, but that the sums invested are growing less than in the US. Since venture
capital plays a crucial role for the creation of innovative start-ups in a continent where capital
markets are particularly unsupportive of non established businesses, the public concern for
fostering the supply of funds to industry appears justified. However, studies for the US
also suggest that it is probably the demand, rather than the supply of venture funds to be
constraining the rise of the industry (see Gompers and Lerner (1998)). We then look beyond
the supply side to the ability of European venture capital to deliver more than pure financing.
Our results show that in Europe venture capital is not systematically associated with
particularly dynamic companies, whether we look at sales growth, at new employment, or at
stock market performance. The limitations of our data make us stop short of a final answer,
but they resonate well with an increasing body of evidence that European venture capital lacks
more more human than financial resources. For instance, recent case studies show that in the
1990s German venture capital suered from a lack of qualified, experienced professionals (see
Becker and Hellmann (2000)). In an insightful survey study, Freeman (1998) finds that lack
of human resources is cited by respondentsinsiders to the industryas a major problem
for the maturation of the German venture capital industry. We mentioned the relative stock
market under-perfomance of venture-backed companies in Europe, as compared to the United
States, which might be another indication of an immature industry.
This interpretation, while still tentative, would also be consistent with the need to learn
its ropes by this still very young industry. After all, American venture capital matured over a
much longer period, which was not always a bed of roses. Other facts point to this direction.
For instance, in 2000 the number of investee companies per venture firm in Europe was three
times as large in Europe as in the United States (23 to 8). Since eective nurturing requires
an intense and close relationship with investee companies, beyond a certain threshold the
quality of the soft side of venture capital might well fall. To us, these facts and the evidence
we uncovered suggest that creating the conditions for a more mature venture capital industry
should be a high priority for European and national policy-makers.

54

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Data Appendix
We collect our information from all available issuing prospectuses and annual Reports
or Euro.nm listed companies. Data are codified for all available years prior to the IPO
(from prospectus information, which typically contains information for the three years before
listing), as well as for all available years after the IPO (from subsequent annual reports).
Some companies choose to end their fiscal years in a month dierent from December. In
these cases if the companys fiscal year ends between January and June we consider it as
ending the previous December, otherwise we consider it ending the following December. For
the year 2000 in the few cases where the annual report was not yet issued at the time of
writing, we rely on end-year ocial announcements of results.
Since 1999 most information is reported in euros. For earlier years we use monthly
averages of the exchange rate between the ECU and national currencies to obtain an euroequivalent. For subsequent years we use euro conversion rates.
Financial and business variables
We codify several financial variables: assets, debt, equity, and Ebitda (earnings before
interest, taxes, depreciation and amortization), from which we compute leverage (debt divided
by debt plus equity) and ROA (return over assets, computed as Ebitda over assets). Ebitda
is a common measure of a firms profitability which does not depend on its financial policy
and tax regime.
We computed the amount of capital raised at IPO as the issue price times the number
of shares sold at IPO, except those sold by existing shareholders, but including the amount
of greenshoe actually used. The amount of shares issued under the greenshoe over-allotment
option is taken from the web site of the stock exchange for the German and Italian markets,
and for the French market until the end of 1999. For French IPOs in 2000 we contacted
directly issuing companies.
We take from the prospectus and annual reports information about a companys business
and strategy. We codify the following variables: Sales (total revenue from sales of goods and
services), Employees (at year end), Capex (capital expenditure), Foreign sales share (share
of foreign sales over total sales), Intangible assets (the stock of goodwill, patents, software
and advertising), and R&D (current expenditure in research and development. From these
data we can compute R&D intensity (R&D over Sales). Patents would be a natural measure
of a firms innovation strategy. Unfortunately, the nature of the data makes it dicult to use
them sensibly since patent applications take about 18 months to be released by the European

Patent Oce, so we are only starting to get patent data for the post-IPO period.
Sectoral attributions
Each company in the data set is assigned to a sector. The procedure we use is based
on the sectoral attribution of Datastream, which are derived from the classification of the
Financial Times. We use the following seven sectors: BIOMED, FINSER, ITSIS (comprising
Internet, IT services, and software), MEDIA & ENTERNAINEMENT, TECHNOLOGY,
TELECOMMUNICATIONS, and TRADITIONAL (products and services).
We also employ an alternative sectoral classification, following the sectoral attributions
introduced in May 2000 by the Neuer Markt, and we obtain very similar results as the one we
report in the main text. The Neuer Markt assigns each company to the sector which generates
the largest share of its earnings. For companies listed in markets other than the Neuer Markt
we attribute sectors by looking at the business description contained in the issuing prospectus, and we augment the Neuer Markt classification with two further sectors: Manufacturing
(other than high-tech products) and (traditional) Services. The nine resulting sectors are:
Biomed (which includes biotechnologypharmaceutical products and services based on applications of geneticsand medtech-medical goods and health care services), Financial services
(banking, insurance and brokerage, usually provided through the internet), Industrial Services (innovative services for industrial firms), ITSIS (infrastructure for the internet, internet
services, IT services, internet, software), Manufacturing (goods other than high-tech), Media
and entertainment, Services (marketing services, wholesale and retail distribution, business
consulting, logistic services), Technology (high-tech products and services), and Telecom.
Venture capital data
In order to identify venture capital financing we could not rely on a simple procedure. A
venture capital firm is not a bank, which can be readily identified as such. Since no license
or professional registry exist, one must resort to a number of identifying conditions. For
each company we proceeded to identify from the listing prospectus the venture capitalists
which provided financing, starting from a pool of more than 300 candidates, i.e. financiers
which were not founders, nor individuals, friends and families, or strategic partners (i.e. other
companies). For each company we used the information about its ownership structure at the
time of the IPO, which lists all its shareholders and details their holdings before and after the
IPO. This helped us identify which venture capitalist have been involved with the company,
and the extent of their shareholdings. A potential limitation of relying on data at IPO is
that a venture capital might have already exited the company. This turns out to be a rare
event, since the venture capital can profit much more by remaining until IPO. Moreover,

the US experience shows that when a venture capital sells before IPO, it usually sells to
another venture capitalist, in which case the presence of a venture capitalist at IPO would
still show up. Direct inspection of the history section of all prospectuses revealed that a
venture capitalist exited before IPO only in a couple of cases.
The process of identification of venture capitalist consisted of several steps. First, We
identified venture capitalists by using the directories of the European Venture Capital Association and the directories of the British, Belgian, Dutch, French, German, Italian, Israeli,
and US national venture capital associations. The venture capitalists members of one of
these association form our tier 1, or core, group of venture capitalists, and they total 123.
We then proceed to using other sources in order to identify venture capitalists which are
not members of an association. Using online directories of venture capitalist (mainly at regional level), web sites, IPO prospectuses, and press sources we check if each candidate is
defined as an actual venture capitalist. These self declared venture capitalists form our
tier 2 group, which comprises 75 more venture capitalists. Overall, our sample reveals that
198 venture capitalists were involved with companies listed on Euro.nm. Ten of these were
national branches of international venture capital groups, like 3i group, the British private
equity and venture capital firm. We report the results we obtain using the broader definition
of venture capitalist (i.e. those falling in either tiers), as our results do not change if we
restrict the definition to the core.
For each venture capitalist we measure from the prospectus the share of equity held at
IPO and the amount which is sold at that time. Finally, we then looked at information about
the date of entry of venture capitalists, i.e. the date at which they first contributed funds to
the company. If more venture capitalist are involved with a company, we use as date of entry
that of the first of them which got involved with the company. The entry date could often
be identified from the companys own history description. In all the other cases we directly
contacted the company. Overall, we could assign the entry date in 90% of the cases.
Price data
We take our price data from Datastream. We collect price data for all the companies in
our data set, excluding the sixteen ones in the financial services sector. We use daily closing
prices, which are corrected for stock splits and changes in nominal value of the underlying
stocks.
Definitions of the variables
The following is a list of definitions for all the variables we use.
AGEIPO is the age of a company at the date of its IPO. To determine a companys date

of birth we employ the earliest evidence of business activity in the listing prospectus, which
need not coincide with the date of incorporation. In fact, several companies were born as
partnerships or limited companies before incorporating.
TIME-TO-LISTING (TTL) is the time elapsed from a companys foundation to its IPO. For
companies born before the opening of the Euro.nm market in which they list, TTL is the
time elapsed from the opening of the Euro.nm market and their IPO. Two companies which
went public in the same month but which are listed in two dierent markets may then have
two dierent TTL, since dierent markets opened at dierent times.
VC is a dummy variable that takes the value 1 if a company has received venture capital
financing, and 0 otherwise.
AMOUNT measures the capital raised at IPO. It equals the issue price times the number of
shares sold at IPO (except those sold by existing shareholders, but including the greenshoe).
BIOMED, FINSER, ITSIS (comprising Internet, IT services, and software), MEDIA & ENTERNAINEMENT, TECHNOLOGY, TELECOMMUNICATIONS, and TRADITIONAL (products and services), are dummy variables which take the value 1 if the company operates in
that industry and 0 otherwise.
We use the following financial variables:
ASSETS is current total asset.
DEBT is the sum of commercial and financial debt.
EQUITY is total shareholders equity.
EBITDA is earning before interest, taxes, depreciation and amortization.
DEBT-TO-EQUITY is DEBT divided by EQUITY.
LEVERAGE is DEBT divided by DEBT plus EQUITY.
ROA is EBITDA over ASSETS.
We use the following variables which reflect a companys business situation and strategic
choices:
SALES is total revenue from sales of goods and services.
EMPLOYEES is the total number of employees at year end.
CAPEX is capital expenditure, i.e. investment in tangible and intangible fixed assets.
FOREIGN SALES SHARE is the share of foreign sales over total sales.

INTANGIBLE ASSETS equals the capitalized amount of goodwill, patents, software and
advertising.
R&D is current expenditure in research and development.
R&D INTENSITY is R&D over ASSETS.

Web Appendix
Contents
This Appendix we provide additional information to that provided by the main text.
Part 1 provides two additional descriptive tables about venture capital investments in Europe. Part 2 provides four additional regressions, which we comment in the main text, where
we control for R&D or R&D intensity. Part 3 provides additional explanations on the econometric techniques used to perform our robustness checks.

Part 1: Additional descriptive statistics

Table WA-1. Frequency of venture capital investment
Venture capitalist

Nationality

Number of investees

3i Group

INT(UK)

27

Apax Partner

INT(UK)

12

Galileo Partners

12

Gold-Zack AG

12

Technologie-Beteiligungsgesellschaft

12

ABN Amro Ventures

INT(NL)

10

BNP Developpement

10

Financiere Natexis

10

INT(US)

INT(F)

Sonova Partners

TBG-Technologie-Beteiligungsges.

Banexi Ventures Partners

Dassault Developpement

CDC Innovation

Sofimac Partners

Techno Venture Management Gmbh

Commerz Beteilugungsgesellschaft

Concord Eekten AG

DEWB-Deutsche Eekten und Wech.-B.

IKB Beteiligungsgesellschaft

Atlas Ventures
Group de Rothschild

Venture Capitalist

Nationality

Number of investees

Knorr Capital Partner AG

TechnoStart GmbH

INT(SIN)

AXA

Bank Austria

Banque de Vizille (Group CIC)

INT(UK)

Schroeder

INT(UK)

Thompson Clive & Partners

INT(UK)

Alpinvest

BUWB Bayerische

CEA Capital Partner GmbH & Co. Beteiligungs KG

Europ@web (Groupe Arnault)

TFG Venture Capital AG

UCA Unternehmer Consult AG

Financiere Vecteur

LBB Beteiligungsgesellschaft

Paribas

Partcom SA (group CDC)

Private Equity Partners

Sal. Oppenheim jr. & Cie.

S-UBG AG

INT(US)

Alta Berkeley

US

Apollo Invest

BayBG Bayerische

BB-Kapitalbeteiligungsges.

bmp AG

BW-Venture Capital

DG-Private Equity

Epicea SA

IBB Beteiligungsgesellschaft

Vertex Management LTD

HSBC Private Equity

IRDI de Midi

Advent International

Venture Capitalist

Nationality

Initiative and finance

Number of investees

KB Partners, LLC

US

Mivtah Shamir

IL

Pechel Industries

Pino Venture Partners

Saarlandische Kapitalbeteiligungsges.

SNBV Partecipations

Sogginove (groupe Societe Generale)

Sopromec

TechnoStart GmbH

Transconnect GmbH

Value Management & Research

Ventech

Venture-Capital Baden-Wuerttenberg

WeHaCo Kapitalbeteiligungs GmbH

West-LB

Other venture capitalists with one investment

122

Notes: INT stands for international, i.e. a venture capitalist with active oces in more than three
countries. In brackets the nationality of the headquarters.
Source: Authors calculations.

Table WA-2. Venture capital, sectoral specialization

Euro.NM

VC-backed

Biomed

12

Traditional (manufacturing and services)

ITSIS (IT Services, Internet, Software)

57

53

Media & Entertainment

10

Technology

16

17

Telecommunications
Source: Authors calculations.

Table WA-3. Corporate growth: descriptive statistics

Pre-IPO
Mean

Median

Min

Max

S.D.

Obs.

113

44,823

2,082

463

Debt

28

7,967

370

462

Equity

72

1.3

28,213

1,383

416

EBITDA

5.8

0.5

-18.1

1,679

79

456

Leverage

0.7

0.8

0.2

414

ROA

0.1

0.1

-6.1

5.1

0.7

455

Sales

52

7.5

12,344

576

463

Employees

141

68

1,538

216

413

Capex

1.8

0.6

-2.8

37

342

Foreign sales (%)

0.2

0.3

282

Intangible assets

2.6

0.2

30.8

8.6

372

0.8

17.4

156

0.8

0.1

20

1.7

158

Assets

R&D
R&D intensity

Post-IPO
Assets

195

53.1

0.2

13,187

1,013

355

Debt

64.2

14.9

0.2

5,194

302

354

Equity

123

33.5

7,959

616

350

EBITDA

-17.1

1.8

-7,035

338.9

379

352

Leverage

0.4

0.3

0.2

349

ROA

5.1

0.04

-140

1.853

99.5

349

Sales

121

30

18,287

967

360

Employees

399

194

10

3,210

553

332

Capex

37.7

6.3

-96

3,860

235

293

0.2

0.1

10.3

147

Intangible assets

39.5

2249

162

299

R&D

13.8

3.3

731

65.6

152

0.4

0.1

32

2.6

152

Foreign sales share (%)

R&D intensity

Notes: For ease of comparability, we drop 34 companies with negative equity values in the preIPO period, and three companies with negative values in the post-IPO period. Source: Authors
calculations.

Part 2: Statistical analysis, controlling for R&D

In the tables preVC indicates variables which are measured before the arrival of the venture
capitalist, while atIPO indicates variables which are measured at the time of the IPO.
Significance levels are indicated by * (10%), ** (5%), and *** (1%). Huber-White corrected
standard errors are used to obtain robust estimates.

Table WA-4. Probit regressiondependent variable venture capital

Independent

Marginal increase

Variables

Coecient

z-statistic

-0.05

-0.15

-0.736

-0.006

-0.02

0.221

0.75

in probability

R&D intensity(preVC)
Sales(preVC)
Leverage(preVC)
Constant

-3.04

Number of obs.
Log likelihood
W ald2 (7)
P-Value

-1.816
1.522

***

-4.688

101
-54.02
8.7
0.001

Table WA-5. Cox regressiondependent variable timeto-listing

Independent variables

Hazard ratio

t-statistic

R&D(atIPO)

1.00

Venture capital

0.83

-1.22

Leverage(atIPO)

1.07

0.17

ROA(atIPO)

1.00

-1.30

France

0.34

***

-5.56

Age*97

1.01

***

7.29

Age*98

1.01

***

6.31

Age*99

1.00

1.70

Age*100

1.00

***

Number of obs.

186

Log likelihood

-752.98

W ald2 (14)

194

P-value

0.00

***

7.01

-3.13

Table WA-6. Robust regressiondependent variable amount of funds raised

over assets
Independent variables

Coecient

t-statistic

R&D intensity(atIPO)

-0.005

-0.424

0.065

1.574

0.49

1.241

Sales/Assets
Venture capital
Leverage(atIPO)

2.717

**

2.327

ROA(atIPO)

-1.184

***

-3.416

Age

-0.005

***

-2.510

France

-1.883

***

-4.165

3.642

**

2.010

Constant
Number of obs.

180

F (12, 167)

4.07

P-value

0.000

Table WA-7. Robust regressiondependent variable employment growth

Independent variable
R&D(atIPO)
Venture capital
ROA(atIPO)

Coecient
11.59

t-statistic
***

-27.94

-1.134

-7.82

-0.256

Leverage(atIPO)

185.51

***

Foreign sales

-46.11

Age
France
Constant
Number of obs.

4.037

0.03
-69.68
77.12
117

F (11, 105)

-4.43

P-value

0.000

2.948
-1.829
0.811

***

-2.548
1.204

Table WA-8. Robust regressiondependent variable sales growth

Independent variables
R&D(atIPO)

Coecient

t-statistic

2.04

***

5.041

Venture capital

-7.90

***

-2.435

ROA(atIPO)

-3.90

-1.366

Leverage(atIPO)

18.10

**

2.015

Foreign sales

-1.22

Age
France

0.03

-0.343
**

2.351

-1.10

-0.301

Constant

9.54

1.263

Number of obs.

143

F (11, 131)

5.31

P-Value

0.000

Part 3: The stratification estimator

Here we discuss the implementation of the stratified estimation method we use in our
robustness checks. When the dimensionality of the vector Xi becomes unwieldy, one possibility is to make use of the propensity score method, i.e. to estimate the probability
(p(Xi )) of obtaining venture capital conditional on observables Xi . Observations with the
same propensity score will then have the same distribution of the full vector of observables
Xi . This methodology entails a two step strategy: We first estimate the propensity score,
and subsequently the conditional average of the variable venture capital.
In order to estimate the average eect of venture capital we need first to estimate the
propensity score for each observation of our sample. We use a probability model where we
introduce the following covariates (Xi ), which we measure at IPO: return on assets (ROA),
sales, the dummy for foreign sales,, and controls for country and sector of activity.
Then, following Dehejia and Wahba (1998) we stratify the estimated propensity scores
for venture-backed and non venture-backed firms into five blocks (bins) of equal score range
(0-0.2,..,0.4-0.6). Ideally we would like to have the same frequency of venture-backed and non
venture-backed firms in each bin. We check whether we succeed in balancing the covariates
within each stratum by testing for the equality of the first and second moments of covariates
within each stratum. If there are no dierences we accept that specification. Otherwise we
split the block and test again. Six observations for venture-backed companies are discarded
since their propensity scores were lower than the minimum value of the propensity scores
associated to non venture-backed companies.
The stratification estimator is then nothing more than a weighted average of the dierence in means for the variable Y, across the discrete bins produced by the propensity score
estimation:

X
X
X
1
1
1
NV C(
YiV C
YiNV C )
=
V
C
NV
C
b b
N
Nb
Nb
iV C
iNV C
b

where VCb and NVCb are the sets of VC backed and non VC backed observations in each bin
V C the corresponding numeber of observations. The relative variance can also
and NVb C ,NN
b

be computed as:

V ar( ) =

1
NV C

"

ar(YiV C )

#
XNV C NV C
NV C
b
b
+
V ar(Yi
)
N V C NbN V C
b