The Rise of Venture Capital and IPO Quality

Amrita Nain; Jie Ying; Joseph Arthur

doi:10.1016/j.jempfin.2025.101613

•A rise in venture capital supply leads to a decline in the quality of firms going public.•Venture capital disproportionately funds the most promising firms, causing these firms to delay public issuance.•The stock market does not fully recognize the decline in IPO firm quality, as evidenced by lower post-IPO abnormal returns.•The research highlights the negative effects of rapidly growing private markets on everyday investors. We show that an increase in the supply of venture capital (VC) leads to a decline in the quality of firms going public. We argue that due to VC selectivity, private capital flows disproportionately to the most promising firms causing them to hold back from public issuance. Post-IPO abnormal returns indicate that the stock market does not fully incorporate this decline in quality at the time of the IPO. Our research adds to recent evidence on the negative impact of fast-growing private markets on Main Street investors. We thank participants at the 2019 Midwest Finance Association Meetings and participants of the seminar series at the University of Iowa, Iowa State University, University of Missouri, and Ludwig Maximilian University of Munich for helpful comments. We thank PrivCo for providing proprietary data on revenue and venture capital valuations of a sample of start-up companies. All errors are our own. Amrita Nain (contact author), Tippie College of Business, University of Iowa, Iowa City, 52242; amrita-nain@uiowa.edu. Jie Ying, Department of Economics and Finance, Southern Illinois University, Edwardsville; jying@siue.edu. Joseph Arthur, Tippie College of Business, University of Iowa, Iowa City, 52242; joseph-arthur@uiowa.edu “Investors and corporate boards stepped back from the IPO market, wary that the stock market would value their companies at less than prior fundraising rounds. And together with cheap funding that's widely available for private companies, it helps explain why many richly valued startups and others aren't rushing to go public. Indeed, some investors and underwriters say there's concern that the public markets are being used as a last resort.” Wall Street Journal article11As IPOs pick up, big startups hold out” Wall Street Journal, May 8, 2017

The Rise of Venture Capital and IPO Quality

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