Chapter 3

The added value of VC

The Data

How to create a control group for VC-backed start-ups?

Does VC help start-ups grow more?

What happens to a start-up’s performance if we remove the VC backing? To find out, we should compare start-ups which received a VC investment and ones that could have, but didn’t. How can we do this? Similar to a clinical trial, here the drug is the VC investment, and a group of control firms needs to be identified. Once the tricky task of constructing a comparable group is overcome, measuring the difference in financial growth between VC- and non-VC-backed start-ups will reveal the added value of venture capital.

So, what are the results of our impromptu trial? We found that both VC- and non-VC-backed start-ups grew financially over time on average. However, some differences emerge when the growth trajectories between the two groups are compared against each other over the six years following the VC investment. VC-backed start-ups grew faster in terms of assets throughout the whole period under consideration.

They also consistently recorded a higher share of intangible assets, highlighting VC-backed firms’ larger efforts in innovation. As reported previously, this measure for innovation does not increase with time as opposed to the rest of the financial indicators. This is the case for both groups, however, which means the result is not related to the VC investment.

When it comes to revenue and staff growth, the differences between the two groups are more subtle. VC-backed firms start off with lower levels of operating revenue at investment date, but quickly catch up with their non-VC-backed counterparts after just one year. In the following periods, there are no statistically significant differences, mostly due to the high variation across firm performance. This is valid in the case of staff as well – there is no hard evidence of any divergence between VC- and non-VC-backed start-ups. However, growth trajectories do not tell the whole story.

Growth of assets

Median, EUR thousands

Growth of revenue

Median, EUR thousands

Growth of intangibles (share of total assets)

Average percentage

Growth of staff


What about start-up growth profiles in the absence of VC investment?

When a comparable growth period for a set of non-VC-backed start-ups is analysed, we find that the same five profiles emerge. However, there are more than three times more laggards in the absence of VC: 10% of non-VC-backed start-ups against 3% of VC-backed companies belong to the worst performing profile. This result already provides some evidence towards the benefits of VC financing, that is, uplifting some start-ups to more promising growth trajectories.

In general, firms are distributed very similarly. Irrespective of the VC investment, the majority are commoners, followed by all-rounders with roughly the same share of defaults (7%). Few companies over- or under-perform, as previously found. Be aware, however, that firms are sorted in different profiles according to their relative performance within each group – VC and non-VC. What does that mean? VC- and non-VC-backed start-ups belonging to the same profile did not necessarily record similar results. This becomes more apparent when we look at growth rates’ differences within each profile.

VC vs non-VC-backed start-ups' growth profiles

VC vs non-VC-backed start-ups' growth rates across profiles*

Are growth rates within profiles also similar without VC financing?

We find that VC-backed start-ups grew more than their non-VC-backed counterparts in every financial measure across all profiles, save for VC-backed laggards. In some cases the difference is striking. For example, in the all-rounders cluster, VC-backed firms recorded 118 percentage points (pp) higher turnover and 36 pp higher costs growth. In the visionaries and superstar profiles, VC-backed firms outran their counterparts in innovation by an impressive 331pp and 190 pp respectively. All in all, the VC impact for 90% of companies is substantial - receiving an investment allowed start-ups to improve further and faster than their non-VC-backed peers.

As stated above, the sole exception to the rule concerns the laggards, where we see hardly any difference between the VC- and non-VC-backed start-ups. Non-VC-backed companies shrink less than their counterparts in some measures, but fall behind in others. Be that as it may, VC-backed firms still excel against non-VC backed firms in the area of intangible fixed assets – regardless of the growth profile. This highlights VCs’ preference for, but also ability to, foster innovation.

How can we compare two different states of the world?

Mind the… regression to the mean

Where would VC-backed start-ups be without the investment?

The VC investment also affects start-ups’ overall growth profile. This means that without the additional support of VC, a successful start-up might have ended up in a different cluster, typically exhibiting lower growth. How do we know this? As explained in the beginning of the chapter, for each start-up we compared two states of the world – with and without VC. It’s as if we could go back in time, take away the start-up’s financing, and look at its future under this “what if” scenario.

Start-ups exhibiting high growth would have actually fallen in much less successful profiles if they hadn’t received the VC investment. This is especially the case for superstars since around a quarter of them would have choked somewhere on the steep road to success, turning into laggards or defaulting altogether. Visionaries exhibit a similar trend – over a third would have found themselves among the commoners while only 20% would have still developed their innovative power. Our data shows that, when an entrepreneurial idea has a high potential for success, venture capital will expand opportunities for growth and allow excelling start-ups to unleash their full potential.

However, the effect of VC may not be that obvious for the less successful profiles - commoner start-ups would mostly have remained such while the (few) laggards and defaulters would have largely ended up as commoners without VC. While this result may seem counterintuitive at first, it may be offering evidence that venture capital can do wonders, but it cannot prevent companies from reaching their inevitable fate. In fact, occasionally, poorly growing VC-backed companies would have survived longer without VC – perhaps to meet their dire destiny down the line anyway. In the end, not every frog kissed turns into a prince.

Drilldown into the different growth categories

Mind the… selection bias


Most superstar(t-up)s would have been unable to achieve their latent performance growth without a VC investment. Only around 20% would have remained part of the same profile, 28% would have joined the visionaries and 13% - the all-rounders. An even worse fate would have befallen the remaining ones, which would have ended up either as laggards (17%), commoners (18%) or gone out of business by their fourth year (5%).


Only 20% of visionary start-ups would have remained truly innovative, although the majority would have still stayed in a high growth cluster. Around 40% would have switched to the all-rounders profile and the rest would have ended up as commoners (37%) or would have defaulted altogether (5%). This is another solid piece of evidence that venture capital helps companies develop their innovative potential.


More than a third of all-rounders would have remained in the same profile, while the majority would have switched to a different profile in the absence of a VC investment. Only 10% would have been better off – winding up as visionaries or superstars (2% and 8% respectively). More than half of them would have performed considerably worse, becoming part of the laggards’, commoners’ or defaulters’ clubs.


The impact of VC investments on commoner firms was mild at best. The majority (58%) would have grown this way in any case. A further 23% would have been better off without VC (with 16% of all commoners ending up among the all-rounders, 4% among the visionaries and a lucky 3% becoming superstars). Out of the remaining 19%, an unlucky 12% of commoners would have been downgraded to laggards and 7% would have defaulted without the VC investment.


VC investments don’t always work out for the best. For the few of laggard start-ups, receiving a VC investment appears to have been an unwelcomed circumstance. Without VC, half of them would have moved to the commoners and only 17% would have remained laggards or have defaulted. The rest would have actually joined the more successful profiles, although in absolute numbers this share is hardly significant.

What are the main takeaways from this hypothetical world without VC?

For one, venture capital may not be that impactful for low growth companies. Most commoners remain such and most of the laggards would not have performed much better. This finding may not be so intuitive, but it essentially means that VC doesn’t work like a magic spell, turning every start-up into a unicorn. Some ventures were simply not destined for greatness.

In the same time, however, VC can make all the difference for some bold and innovative ideas. If we remove venture capital backing from the picture, a half of high growth start-ups (superstars, visionaries and all-rounders) move to a less successful profile. In the particular case of superstars, 40% lose their status and become laggards, commoners or even go bust. The same prominent effect strikes visionaries as well – around 40% move down the ladder in a “no-VC” world. This supports the theory that venture capital has an outsize positive effect on innovative businesses. Moreover, performance within profiles is much stronger for VC-backed companies since the latter grew more than their non-VC-backed counterparts in every financial measure. In the end, VC cannot change the business reality where some firms make it while others break it, but it can be the deciding factor in a start-up’s road to success.