CRIEFF Discussion Paper Number 0503

Realities of Long-Term Post Investment Performance for Venture-Backed Enterprises

Gavin C Reid (University of St. Andrews) and Julia A Smith (Cardiff University)

Abstract
This paper constructs a model of long-run performance for SMEs that have received venture capital backing. The model explains performance by financial structure. FAME data are used for estimating performance equations over the period 1989 to 2004 for UK businesses in their post-investment period. The econometrics uses robust techniques, including least absolute error (LAE) and Tukey trimean estimation. It is shown that the key determinants of performance (measured by ROSF) are profit margins and risk, with lesser, but significant, roles played by liquidity and gearing. The sample is used to identify consistently high performers, and chronic low performers. From the latter group, two detailed case studies illustrate how chronic low performance can emerge, in each case caused by failure to achieve technological milestones, and thereby failing, ultimately, to convince investors of potential company worth.

JEL Classifications
G24, G32, L25, M13, O32

Keywords
Venture capital, investment performance, LAE estimation, research milestones

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