Working papers

Evaluating Selection Bias in Early-Stage Investment Returns, with Aksel Mjos (Norwegian School of Economics) and David T. Robinson (Duke University and NBER)  (Revise & Resubmit at JFQA)

This paper investigates sample selection bias in early-stage investment returns using comprehensive administrative data on the universe of new firm starts in Norway. We apply the logic of repeat-sales indexes to equity transactions, comparing returns of venture-backed firms with those of the broader set of startups with similar measures of ex ante observable innovation potential. We uncover two critical selection biases: a venture/nonventure bias, in which venture-backed firms exhibit consistently higher valuations due to matching selection, and a multi-round bias, in which firms that receive multiple financing rounds outperform single-round firms. The former bias is larger, underscoring the role matching with venture financing plays in shaping startup outcomes.

Are Some Angels Better than Others?, with Johan Karlsen (Norwegian School of Economics), Aksel Mjos (Norwegian School of Economics) and David T. Robinson (Duke University and NBER)  

This paper uses Norwegian tax records to examine the performance of angel investors. While most angel investments perform poorly, mean returns are twice the invested capital, due largely to extreme skewness: around one-third of investments are a total loss, but the top one-percent return more than fifty times invested capital. Performance persistence among angels is largely attributable to unobserved investor characteristics. Professional networks are critical determinants of performance: top-performing angels tend to have broader business connections with startups and fellow investors, consistent with having access to superior deal flow.

Public Funding for Entrepreneurs: What Works Best? 

Using Norwegian administrative data on the population of entrepreneurial firms, I simultaneously compare three public financial support instruments -- equity, loans and grants -- in a unified setting. I find that public support, regardless of type, increases firm investments by 20%. Revenues increase twice as much after a firm receives a loan as after it receives a grant, implying the financial instrument incentives channel drives the effect of loans. Public equity operates through the certification channel resulting in an increase in firm market capitalization by 36% on the extensive margin only. These findings have direct implications for policymakers weighing alternative policy designs.

With a Little Help From My Family: Informal Startup Financing, with Brian K. Baik (Harvard Business School) and Johan Karlsen (Norwegian School of Economics) 

Using a unique dataset that contains financial information of Norwegian startups and their investors, we depict the characteristics of informal financing, which are startup investments made by family of the entrepreneur. Consistent with theoretical predictions, we document that informal investments are associated with lower returns than external investments, and lower startup risk-taking behavior. On the other hand, firms that receive investments from both informal and external investors exhibit stronger forms of risk taking. Our instrumental variables (IV) regressions further support our findings. Reduced risk-taking behavior is mainly driven from wealthy informal investors, which is consistent with the argument that wealthy investors may be more risk averse. Collectively, our findings empirically illuminate an important source of startup financing that affects startup behavior.

On the Importance of Accounting Information in Early-Stage Financing, with Aksel Mjos (Norwegian School of Economics) and David T. Robinson (Duke University and NBER)  

This paper asks whether available accounting information is important in early-stage financing. We use detailed administrative records from Norway to build a measure of a startup's ex ante innovation potential before it receives financing. This approach allows us to look beyond the set of venture-backed startups to circumvent the endogenous demand for accounting information. The lagged book value of equity, disaggregated into earnings and contributed capital, captures between 27% and 34% of the total variation in valuations across financing rounds. Current earnings not only aggregate the underlying non-financial firm characteristics but also contain incremental information. The latter relates more to the financing decision and amount than to the implied valuations per se. Overall, our findings speak to the importance of accounting information for reducing information asymmetries even in highly uncertain settings, in which investing based on ``gut feeling" may be the norm.

Does Auditing Matter For Early-Stage Financing?, with Aksel Mjos (Norwegian School of Economics), Maximilian Müller (University of Cologne) and Ulrike Thürheimer (University of Amsterdam) 

This paper investigates whether voluntary audits reduce financing frictions in the equity capital market for early-stage firms, which is characterized by high information asymmetries. Motivated by agency and information theories, we explore when and under which conditions early-stage firms start to obtain a voluntary audit, and whether this has consequences for their equity financing outcomes. We use comprehensive administrative data on Norwegian private, early-stage firms and confidential data on their equity investments provided by the Norwegian Tax Authority. We find that the propensity to obtain a voluntary audit increases in the number of financing rounds involving outside equity and that, compared to a firm's choosing not to obtain an audit, choosing an audit voluntarily is associated with beneficial financing outcomes, including a higher propensity to secure future outside equity financing and larger amounts of outside equity financing. We attribute these results to the potential of the audit to reduce financing frictions. We do not find differences in equity financing outcomes between firms with voluntary and mandatory audits.

Work in progress

Firm Dynamics and Accrual Accounting with Daniel Fehder (USC), Eric Floyd (UCSD) and Yael Hochberg (Rice University)

Established Public Firms Creating Newly Public Firms with Merih Sevilir (IWH Halle and ESMT Berlin) 

This paper examines the role of established publicly traded firms in the creation of newly innovative public firms. We document that 25% of startups going public in an initial public offering (IPO) are backed by at least one existing public firm. Public firms provide not only monetary capital to startups they finance but also they are important business customers to them. While startups backed up by public firms are younger, smaller, more R&D intensive and less profitable than only venture capital (VC)-backed startups at the time of their IPO, a greater percentage of them continue to survive as independent public companies. They raise greater amount of financing at their initial public offering (IPO) and experience larger first-day returns than their VC-backed counterparts. In addition, they exhibit similar levels of CAPEX and employment growth as VC-backed startups while they undertake greater R&D spending subsequent to becoming a public firm. The positive relation between having a public established firm as a financier and customer, and the R&D intensity of the startup going public is stronger in the post Sarbanes Oxley era. These results are consistent with established firms providing a distinct role in supporting startups, facilitating their access to public capital markets through an IPO, and contributing to the creation of newly public firms. Hence, our paper provides an alternative perspective to the current debate regarding the concern that established firms limit competition, innovation and entrepreneurship by conducting "killer acquisitions".

Accounting Quality and Venture Capital Involvement, with Marti Guasch (ESADE) and Alexander Montag (Warwick Business School) 

Other publications

What Information do Startups Provide to Their Venture Capital Investors? with Malte Lorenz, ESMT Knowledge 2017.

Identifikation nahe stehender Personen im Rahmen der gesetzlichen Abschlussprüfung (Identification of related parties within the statutory annual audit), with Klaus Ruhnke (Freie Universität Berlin), Die Wirtschaftsprüfung (65), 1079-1088.