Venture capital as a tool for regional development: Exit patterns and long-term consequences

Licentiate thesis, 2019

Venture capital (VC) funded high-tech startups are often cited drivers of economic impact and catalysts of regional growth. Public support of high-tech startups and investments into venture capital has thus been a popular focus for public policy globally in the past decades. This is despite that the long-term, and post-exit, impact of most venture capital funded startups is little known, especially for regional development. To the degree startups have been tracked after exit, there is evidence of startups both growing and disappearing post-exit, with exit route often suggested as an influence of post-exit growth as well as relocation. The purpose of this thesis is thus to investigate the suitability of venture capital for regional development, by studying the long-term and post-exit outcome for venture capital funded startups.

This licentiate dissertation builds on four studies on startup exits. The first study, ‘Migration patterns of venture capital funded startups’, explores quantitatively startups exits in five innovative regions: San Francisco Bay Area encompassing Silicon Valley, Colorado, North Carolina, Israel and Sweden. Conclusions are that regional exit patterns are dominated by acquisitions, with ownership of the most valuable startups concentrated to Silicon Valley. In the other four regions, only a small portion of the value of the startups remain owned in their regions. The second study, ‘Growth of Swedish venture capital financed startups after IPO and acquisition - the case for exit-centric policy?’, quantitatively tracks the post-exit growth of venture capital funded startups in Sweden 1992-2010. Conclusions are that post-exit growth is dependent on exit route. Startups which exit by IPO grow faster than acquired startups, and half of the acquired startups are consolidated within a couple of years after exit.

The third study, 'Venture capitalist's exit choice: Deciding the fate of successful startups', examines how venture capitalists make exit choices for startups. Conclusions are that venture capitalists alone decide on exit, overriding entrepreneurs if required, with a preference for acquisition exits and a reluctance to take firms public. The final fourth study, ‘Startup exits and the evolution of entrepreneurial ecosystems: Exploring divergent paths’, maps qualitatively the post-exit behavior of entrepreneurs, business angels, venture capitalists and key employees in startups dependent on the financial exit success. Conclusions are that growing entrepreneurial ecosystems require a minimum of profitable exits, and without which entrepreneurial ecosystems will stagnate and depopulate.

This thesis increases our understanding the long-term regional economic consequences of using venture capital to accelerate startups. Venture capital accelerate startups in the time period following their initial investment until the exit. At exit, the venture capitalists have a preference of exiting by acquisition, rather than going public, with the most valuable startups acquired by firms in Silicon Valley. Acquired startups have lower post-exit growth than startups going public, and many acquired startups are consolidated post-exit. For regions other than Silicon Valley, the likely outcome is that their most valuable startups will not remain long-term in their ecosystems. Regions using venture capital as a policy tool for regional growth, should consider modifying their policies to account for the startup migration effects and consider supporting alternative funding mechanisms in their entrepreneurial ecosystems.