Faculty and Research

Venture Capital Organizations and Entrepreneurial Finance

Paul A. Gompers is examining corporate control and governance issues in venture capital organizations and entrepreneurial firms in an effort to understand how their relationships with their investors affect the venture capitalists' investment decisions. Using theoretical models, large-sample empirical research, and field-based case studies, Gompers is examining the governance structures-covenants, restrictions, and compensation-employed in venture capital organizations. He is also examining the relationships between venture capitalists and the entrepreneurs they finance in an effort to identify the control mechanisms the former employ to influence the latter, and is attempting to identify the determinants of success and failure in venture capital-backed companies. Gompers is developing from his findings course materials on venture capital and entrepreneurial finance.

Long-Run Performance Following Equity Issue

In an effort to establish how the transition from private to public firm affects performance, Paul A. Gompers is examining the long-run performance of companies that issue equity in an initial public or seasoned offering. He is also attempting to determine whether involvement with a venture capital backer improves performance. Gompers is using recent innovations in multifactor asset-pricing models to evaluate firm performance and is developing new methods of measuring performance in varied settings. His findings to date demonstrate that underperformance is concentrated in small companies, not backed by venture capitalists, that went public in the early 1980s.

Financing New Business Formation

New business creation has become a potent force for economicdevelopment in the United States. Prior to 1980, large firms created the majority of new jobs in the American economy. While considerable debate rages over whether small firms are the source of recent job creation, it is clear from the data that new firms are an important source of technology, innovation, and jobs. No one would call Microsoft, Apple, or Genentech small companies, but all of them are very young. From 1972 through 1992, more than 4,513 companies went public by issuing equity in an initial public offering. Most of these firms were less than ten years old. New firms continue to transform the economic landscape, but we know very little about the sources of capital and investment behavior of these firms before they go public.

A goal of the project would be research projects related to optimal sources of financing. Some of the research questions that Professor Gompers is addressing include: How do industry and firm specific characteristics interact to determine the optimal source of capital? How does firm performance affect who gives firms their financing to grow? How do the sources of financing affect the speed at which the firm can grow? Have there been secular changes in the sources of financing over the time period? Does the presence of a professional investor, such as a venture capitalist, improve the pre-public performance of a company (e.g. can it reach a critical size sooner) compared to a firm that has not received venture capital financing.