Performance Differences in Indian Venture Capital Financed and Private Equity Financed Firms’ IPOs

Abstract

The objective of this study is to aid startup firms in making informed data-driven decisions when opting for a funding type between Venture Capital (VC) and Private Equity (PE) about their potential impact on future performance as well as to aid investors looking for better returns based on Certification by Venture Capital or Private Equity. This study empirically examines the performance difference between Initial Public Offerings (IPOs) funded by VC and PE in India.

The study uses data of 123 IPOs backed by VC and PE in India, during the time period of 2004 to 2017. It intends to examine the difference in performance and attributes of Indian VC- and PE-backed IPOs. The difference is studied in terms of both initial performance and determinants of performance. In the methodology part, this study uses statistical tools like Analysis of Variance (ANOVA) to test the difference in the means of VC- and PE-backed firm attributes. Discriminant Analysis is used to find the most discriminating factors between the two funding types and to establish a discriminant function between VC- and PE-backed IPOs. Ordinary Least Square (OLS) regression is used to study the degree and direction of the linear relationship between the independent variables and dependent variable, that is, initial price performance.

The findings of ANOVA establish that age, assets, offer size, and IT Industry affiliation are statistically significant differentiators of means between VC- and PE-backed IPOs. The discriminant analysis establishes that age and assets are the most discriminating variables between VC- and PE-backed IPOs. An eigenvalue of greater than 1 and Wilk’s Lambda closer to 0 help in establishing a discriminant function to predict future classification around centroid means. Regression results show that Weighted EPS, Post Issue Promoter Holding, IT Industry and Hot Period are statistically significant variables in determining the initial returns of VC- and PE-backed IPOs. However, there is no difference in the certification effect of VC and PE funding as there is no significant difference in the initial price performance based on funding type in the Indian context. The findings of this study can aid the decision-making of startups and investors in the Indian context, when going for a particular funding type or investing, respectively.

The future studies can examine the VC and PE performance differences based on longer time horizon, geography, and industry. This study is based on assumption of mutually exclusive funding sources and do not cover IPOs funded by both VC and PE, which could be a potential limitation.