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Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies





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    • Kaplan is with the University of Chicago Graduate School of Business and the National Bureau of Economic Research, Sensoy is with the University of Southern California, and Strömberg is with the Swedish Institute for Financial Research. This research has been supported by the Kauffman Foundation, the Lynde and Harry Bradley Foundation, 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, and Sol Garger and Nick Kramvis for excellent research assistance. We also thank Andres Almazan, Ulf Axelson, George Baker, Ola Bengtsson, Effi Benmelech, Patrick Bolton, Connie Capone, Bruno Cassiman, Zsuzsanna Fluck, John Graham, Oliver Hart, Cam Harvey, Thomas Hellmann, Bengt Holmström, Mark Koulegeorge, Augustin Landier, Josh Lerner, Andrew Metrick, John Oxaal, Jeremy Stein, Toby Stuart, Krishnamurthy Subramanian, Lucy White, Luigi Zingales, two anonymous referees, and seminar participants at BI, the Center for Economic Policy Research 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, Tilburg University, The Tuck School (at Dartmouth), University of Chicago, University of Vienna, and University of Wisconsin for helpful comments.


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. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC-backed firms or the time period. The results suggest that, at the margin, investors in start-ups should place more weight on the business (“the horse”) than on the management team (“the jockey”). The results also inform theories of the firm.