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Evolution From Early Business Plans To Public Companies

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We study how firm characteristics evolve from early business plan to initial public offering (IPO) to

public company for 50 venture capital (VC) financed companies. We describe the financial performance,

line of business, point(s) of differentiation, non-human capital assets, growth strategy, top management,

ownership structure, and the board of directors. The most striking finding is that firm business lines or

ideas remain remarkably stable from business plan through public company. Within those business lines,

non-human capital aspects of the businesses are more stable than human capital aspects. In the crosssection,

firms with more alienable assets experience more human capital turnover suggesting that specific

human capital becomes less critical as firms establish non-human assets. We obtain qualitatively similar

results to those in our primary sample for all non-financial start-up IPOs in 2004 вЂ" both VC- and non-VC

backed. This suggests that our main results are not specific to the presence of a VC or to the time period.

We discuss how our results relate to theories of the firm and to VC investment decisions.

* University of Chicago Graduate School of Business and NBER, ** University of Southern California, and ***

SIFR. This research has been supported by the Kauffman Foundation, by the Lynde and Harry Bradley Foundation

and the Olin Foundation through grants to the Center for the Study of the Economy and the State, and by the Center

for Research in Security Prices. We thank the venture capital partnerships for providing data. We thank Andres

Almazan, Ulf Axelson, George Baker, Ola Bengtsson, Effi Benmelech, Patrick Bolton, Bruno Cassiman, Zsuzsanna

Fluck, Oliver Hart, Thomas Hellman, Bengt HolmstrÐ"¶m, Josh Lerner, Jeremy Stein, Krishnamurthy Subramanian,

Lucy White, Luigi Zingales, and seminar participants at BI, the CEPR Summer Symposium at Gerzensee,

Columbia, Cornell, Federal Reserve Bank of New York, Harvard, Hebrew University, Kellogg, Mannheim,

Michigan, NBER Corporate Finance Group, NBER Entrepreneurship Group, RICAFE Conference in Turin, SIFR,

Stockholm School of Economics, Tel Aviv University, Tuck (at Dartmouth), the University of Chicago, University

of Vienna, and University of Wisconsin for helpful comments. Address correspondence to Steven Kaplan,

University of Chicago Graduate School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637 or e-mail




Since Coase (1937), economists have attempted to understand why firms exist and what constitutes

firms.1 Despite the long history of theory and empirical work, there is little systematic or non-case evidence

concerning what constitutes a firm when it is very young and how a young firm evolves to a mature

company. In this paper, we provide such evidence by studying 50 venture capital-financed firms from early

business plan to initial public offering (IPO) to public company (three years after the IPO).

This paper has three main goals. First, we provide a systematic description of the early life and

evolution of an important sample of firms. In so doing, we provide information on firms before the post-IPO

period studied in Fama and French (2004). Second, we consider how our findings can inform and be

interpreted in relation to existing theories of the firm and what new theories might try to explain. Third, we

discuss how our findings relate to an ongoing debate among venture capitalists (VCs) concerning the relative

importance of a young company’s business idea and management team to the company’s success.

In describing the early characteristics of firms and how they evolve, we try to inform different

theories of the firm and, in so doing, provide some systematic and (relatively) large sample evidence relating

to these theories. Several theories emphasize the difference between non-human and human assets. For

example, the basic assumption of the Hart-Moore framework is that firms are defined by their non-human

assets. In the words of Hart (1995), “a firm’s non-human assets, then, simply represent the glue that keeps

the firm together, whatever this may be … Control over non-human assets leads to control over human

assets… If non-human assets do not exist, then it is not clear what keeps the firm together.” (p. 57). Hart вЂ?s

analysis focuses on specific investment and the importance of hold-up problems. HolmstrÐ"¶m (1999) comes

to a similar conclusion, but argues that firm ownership of non-human assets allows the firm to structure

internal incentives and to influence external parties (e.g., suppliers) who contract with the firm.

Two aspects of our analysis address these theories. First, we try to identify the “glue” that holds

firms together. Second, to the extent that the theories are static theories (in that they assume a non-human

1 Both Holmstrom and Roberts (1998) and Gibbons (2004) describe and summarize some of this work.

asset or glue already exists), we provide evidence as to



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