Political Connections of Newly Public Firms: The Nurturing and Certification Roles of Venture Capitalist Investors

This paper examines the relationship between venture capital backing of newly public firms in the U.S. and the political connections established by these firms around their initial public offering. The main findings are: (1) Venture-backed firms make campaign contributions to politicians which are on average almost twice the amounts contributed by nonventure-backed firms. This effect is mainly present during the periods immediately preceding and immediately following the date of IPO, while the VC is present. After the VC exits, the differential disappears. (2) Venture-backed firms do not contribute to politicians’ campaigns using corporate-sponsored political action committees (PACs) as much as nonventure-backed firms. Instead, venture-backed firms’ executives contribute directly in their own names to politicians’ campaigns. (3) After going public, venture-backed firms are awarded government contracts for amounts which are on average 53% larger than for nonventure-backed firms. The difference persists even after the departure of the backing VCs. (4) Politicians’ ownership of shares of venture-backed IPO firms is 15% lower, on average, than their ownership of nonventure-backed firms. This effect is observed only when the backing VC is present. After VC exit, politicians own venture and nonventure-backed firms in similar amounts. The results in this paper suggest both nurturing and certification roles for venture capital investors in the period immediately surrounding the IPO.