Venture Capitalist Certification in Initial Public Offerings

With more businesses going public, the certification of their value and offering price is a necessity, acting as a means of attracting investors and of enhancing further financial success. While auditors and underwriters typically certify the value of an initial public offering (IPO), venture capitalists, as investors in a firm, also have knowledge of the firm's value, leading researchers to explore the potential role of venture capitalists in certifying an IPO's offering price. The process of venture capital (VC) firm certification is described. Utilizing Investment Dealer's Digest Corporate Database (IDD), a representative sample of both VC backed and non-VC backed firms (320 each) is compiled, and matched for industry and offering size. The role of underwriters and auditors in certifying a firm's value is scrutinized, including their respective relationships with VC backed firms. The data regarding initial returns and offering expenses for IPOs are analyzed for both VC backed and non-VC backed firms. Venture capitalists are found to play a significant role in firm certification, including an implication of firm quality due to their investment in the firm. The data suggest that VC backed firms, when compared to non-VC backed firms, tend to be younger, typically comprised of assets of greater median book value, and have attained a larger percentage of equity in the IPO's capital structure. Additionally, VC backing often results in the utilization of higher quality underwriters and auditors, while simultaneously experiencing a decrease in costs associated with underpricing and underwriting. Although a few venture capitalists may cash-out of their investment following IPO, the majority of venture capitalists typically maintain their holdings in firms following the initial public offering. (AKP)