Firms Evolution from Birth to Public Companies

We study how firm characteristics evolve from early business plan to initial public offering to public company for 49 venture capital financed companies. The average time elapsed is almost 6 years. We describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Our analysis focuses on the nature and stability of those flrIn attributes. Firm business lines remain remarkably stable from business plan through public company. Within those business lines, non-human capital aspects of the businesses appear more stable than human capital aspects. In the cross-section, firms with more alienable assets have substantially more human capital turnover.

Introduction: Since Coase (1937), economists have attempted to understand why firms exist and what constitutes firms. Despite the long history of theory and empirical work, there is little systematic or non-case evidence concerning what constitutes a firm at birth and how a firm evolves from birth to mature company. In this paper, we provide such evidence by studying 49 venture capital-financed firms from early business plan to initial public offering (IPO) to public company (three years after the IPO). This exercise has two goals. First, we provide a systematic description of the early life and evolution of an important sample of firms. Second, we consider how our findings can be interpreted in relation to existing theories of the firm and what new theories might try to explain.

Author: Steven N. Kaplan,Berk A. Sensoy, Per Strömberg

Source: Institute for Financial Research

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