A study of the correlation between pre-IPO venture funds and founder characteristics with high-tech firm growth

Abstract

High-tech firms are among the fastest growing in the United States. The four industries with the most rapid growth -internet, software, semiconductors, and technology hardware - have almost doubled their share of industry output in the United States over the last decade. These firms are not only an important stimulus to the national economy but also have spawned new industries and spearheaded the development of innovative products and services. It is for these reasons that these firms are of particular interests to managers, investors, and academics. By examining these firms, researchers can help managers, investors, and academics better understand the attributes associated with firm growth. The purpose of this study was to determine whether any correlations existed between the size of the pre-IPO (initial public offering) venture fund and founder characteristics with firm growth. Twenty different high-tech firms were studied. These firms were divided into two different samples. One sample consisted of 10 firms that went public well before the 2000 recession and the other sample consisted of 10 firms that went public close to the 2000 recession. A 5 year time period beyond an IPO was used for calculating the firm's average growth rate. The results showed a negative correlation between the size of the pre-IPO venture funds and firm growth. No significant correlation between founder age and prior entrepreneurial experience of the founder with firm growth was found.

(cont.) As far as the prior relevant industry experience of the founder is concerned, an average experience of 6+ years was found to be positively correlated with firm growth. Even though, no correlation was found between founder education and firm growth; founders having a masters or a PhD degree outperformed those with a bachelor's or even a high-school degree. The results serve to provide contextual information to managers, investors, and academics who wish to consider their firm's growth potential or in general invest in high-tech firms. In addition, the study adds to the rich literature on the impact of pre-IPO venture funds and founder characteristics on firm success.