An Examination Into the Determinants of Venture Capitalist Ownership Share and Its Effects on the Performance of Startups

Abstract

This paper examines the determinants and effects of different levels of venture capital (VC) ownership share. While startup and VC dynamics have been subject to extensive examination, little research has been devoted to examining VC ownership share in detail. This paper serves to uncover how different startup and founder characteristics determine the ownership share of VC firms in the first round of investment, as well as the subsequent effects this may have on startup performance. Drawing upon research from principal-agent theory, the resource-based view, bargaining power, and entrepreneurial finance, we analyzed a sample of 296 startups through two linear regression analyses. The results reveal that startups operating in high-tech industries generally have a higher share of VC ownership, whereas startups that are younger at the first round of VC investment have a lower share of VC ownership. Relating to the effects, VC ownership share was shown to have a positive effect on the total amount invested into the startup across all funding rounds. These results indicate that there is a tangible connection between startup characteristics and VC ownership share, which may have implications for the performance of the startup. These results may offer theoretical and managerial insight into startup dynamics and serve as inspiration for future research into the topic.