Signal sequences: Venture Capital, IPO and Startup Valuation at Acquisitions

This paper studies how a sequence composed of multiple signals influences the valuation that startups receive at acquisition. Along the startup life-cycle, startups generally first obtain capital from VCs and then go through an IPO. In particular, the strength of the former signal influences the way receiver perceive the latter signal and may become a double edged sword. We argue that, after receiving a strong signal relating to the type of VCs that are backing a focal startup, investors set a high aspiration level about the quality of the startup. Consequently, a subsequent weak signal relating to the type of stock market in which the startup is listed may have a detrimental effect on firm’s valuation. We test our hypotheses performing a difference-in-difference model on a sample of 1343 European entrepreneurial ventures. Results show that a strong signal related to being VC-backed (e.g. being backed by a US investor) will make market observers set their expectations on the firm’s quality at a higher level, so that becoming public on a less reputable market (e.g. in Europe rather than in the US) will decrease its valuation.