Venture capitalists should be sure that the firms they invest in are strong before they decide to cut them lose with an IPO.
That’s the advice from a study by academics who found that the reputation of venture capital firms can be adversely affected for many years if start-ups they had backed fail.
"We show that a firm's reputation is precarious and can be damaged even by an event that is not within the full control of the affected firm. Specifically, firm reputation can be vulnerable to negative events occurring in different industries or by past relationships that a firm no longer has," says study first author Assistant Professor David Gomulya of the SMU Lee Kong Chian School of Business.
The study concludes that VCs create high expectations of the firms that they give their backing to and if those firms subsequently fail, even 5 years after an IPO, the VC’s reputation can suffer.
"VCs must remain vigilant about their reputation. If they want to bring startups public, they should ideally do so after the startups are strong enough to perform in the public arena. They should not rush this process prematurely," Gomulya explains. "Otherwise, any delisting the startups suffer within five years after the IPO can go back and hurt the VC's reputation even after it has 'handed over' the startups to the public domain."
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