Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: Despite the large drop in the number of initial public offerings (IPOs) in the United States, privately-held startups backed by venture capital continue to achieve capital raising, revenue, and employment levels historically available only to their public peers. We show that startups' ability to finance their late-stage growth while remaining private has been facilitated by a marked increase in the supply of private entrepreneurial capital, both from traditional and non-traditional startup investors. Two factors have contributed to this increase: Technological changes that have lowered investor search costs, and regulatory changes that have decreased the frictions faced by startups and their financiers when raising private capital, among them a major securities law passed in 1996 (NSMIA). Our evidence suggests that the lower IPO volume stems from their founders/managers choosing to remain private, rather than a market failure in the going-public process. Consistent with this interpretation, we show that exogenous increases in founder control increase the likelihood that a firm remains private late in its life.