It is not what you know, it is who you know

Abstract: Reputation is widely considered to play an important role in the Venture Capital (VC) industry. This paper examines whether there are any significant positive associations between long-term post-IPO performance and early stage investments from a more reputable VC firm. Our empirical sample consists of 422 VC-backed listed companies in the U.S. between 1997 and 2014. Using market share as a measure for reputation we look at three well-known performance measures: i) industry adjusted rate of return on assets, ii) market-to-book ratio and iii) long-run abnormal stock return. Furthermore, our sample companies are divided into groups depending on the stage in which they have received funding. To assess where our findings might be derived from we use the portfolio companies' investment in capital expenditure as a proxy for growth. We put forth evidence that companies backed by more reputable VC firms in an early stage exhibit better post-IPO performance for all of our three performance measures and show that these companies also demonstrate significant positive association with our growth ratio.