Essay About Firm Characteristics And University Of Chicago Graduate School Of Business

Evolution From Early Business Plans To Public Companies
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We study how firm characteristics evolve from early business plan to initial public offering (IPO) to
public company for 50 venture capital (VC) financed companies. We describe the financial performance,
line of business, point(s) of differentiation, non-human capital assets, growth strategy, top management,
ownership structure, and the board of directors. The most striking finding is that firm business lines or
ideas remain remarkably stable from business plan through public company. Within those business lines,
non-human capital aspects of the businesses are more stable than human capital aspects. In the crosssection,
firms with more alienable assets experience more human capital turnover suggesting that specific
human capital becomes less critical as firms establish non-human assets. We obtain qualitatively similar
results to those in our primary sample for all non-financial start-up IPOs in 2004 — both VC- and non-VC
backed. This suggests that our main results are not specific to the presence of a VC or to the time period.
We discuss how our results relate to theories of the firm and to VC investment decisions.
* University of Chicago Graduate School of Business and NBER, ** University of Southern California, and ***
SIFR. This research has been supported by the Kauffman Foundation, by the Lynde and Harry Bradley Foundation
and the Olin Foundation through grants to the Center for the Study of the Economy and the State, and by the Center
for Research in Security Prices. We thank the venture capital partnerships for providing data. We thank Andres
Almazan, Ulf Axelson, George Baker, Ola Bengtsson, Effi Benmelech, Patrick Bolton, Bruno Cassiman, Zsuzsanna
Fluck, Oliver Hart, Thomas Hellman, Bengt HolmstrĶm, Josh Lerner, Jeremy Stein, Krishnamurthy Subramanian,
Lucy White, Luigi Zingales, and seminar participants at BI, the CEPR Summer Symposium at Gerzensee,
Columbia, Cornell, Federal Reserve Bank of New York, Harvard, Hebrew University, Kellogg, Mannheim,
Michigan, NBER Corporate Finance Group, NBER Entrepreneurship Group, RICAFE Conference in Turin, SIFR,
Stockholm School of Economics, Tel Aviv University, Tuck (at Dartmouth), the University of Chicago, University
of Vienna, and University of Wisconsin for helpful comments. Address correspondence to Steven Kaplan,
University of Chicago Graduate School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637 or e-mail
at [email protected].
Introduction
Since Coase (1937), economists have attempted to understand why firms exist and what constitutes
firms.1 Despite the long history of theory and empirical work, there is little systematic or non-case evidence
concerning what constitutes a firm when it is very young and how a young firm evolves to a mature
company. In this paper, we provide such evidence by studying 50 venture capital-financed firms from early
business plan to initial public offering (IPO) to public company (three years after the IPO).
This paper has three main goals. First, we provide a systematic description of the early life and
evolution of an important sample of firms. In so doing, we provide information on firms before the post-IPO
period studied in Fama and French (2004). Second, we consider how our findings can inform and be
interpreted in relation to existing theories of the firm and what new theories might try to explain. Third, we
discuss how our findings relate to an ongoing debate among venture capitalists (VCs) concerning the relative
importance of a young company’s business idea and management team to the company’s success.
In describing the early characteristics of firms and how they evolve, we try to inform different
theories of the firm and, in so doing, provide some systematic and (relatively) large sample evidence relating
to these theories. Several theories emphasize the difference between non-human and human assets. For
example, the basic assumption of the Hart-Moore framework is that firms are defined by their non-human
assets. In the words of Hart (1995), “a firm’s non-human assets, then, simply represent the glue that keeps
the firm together, whatever this may be … Control over non-human assets leads to control over human
assets… If non-human assets do not exist, then it is not clear what keeps the firm together.” (p. 57). Hart вЂ?s
analysis focuses on specific investment and the importance of hold-up problems. HolmstrĶm (1999) comes
to a similar conclusion, but argues that firm ownership of non-human assets allows the firm to structure
internal incentives and to influence external parties (e.g., suppliers) who contract with the firm.
Two aspects of our analysis address these theories. First, we try to identify the “glue” that holds
firms together. Second, to the extent that the theories are static theories (in that they assume a non-human
1 Both Holmstrom and Roberts (1998) and Gibbons (2004) describe and summarize some of this work.
asset or glue already exists), we provide evidence as to