Do venture capitalists improve the operating performance of IPOs?

This paper uses rigorous measures of operating performance and a sample extending into the post 2000 period to reexamine the performance of venture capital (VC) backed initial public offerings (IPOs). We find that the VC backed IPOs underperform non-VC backed IPOs, especially when firms have high excess cash, and propose that the higher excess cash retained in VC backed firms at IPO date may result in wasteful investment. Post-IPO real investment also confirms this notion. Further, our result holds whether or not VCs are on the board after the IPO date. Overall, our study supports the overinvestment hypothesis. •Venture capital (VC) backed IPOs underperform non-VC backed IPOs, especially when firms have high excess cash.•Higher excess cash retained in VC backed firms at IPO date may motivate them to engage in wasteful investment.•Post-IPO real investment also supports the overinvestment hypothesis