High Differentiation and Low Standardization: The Role of Venture Capitalists in Transforming the Governance and Management of Family Firms
Using a theoretical framework based on Rajan (2012) and Burkart, Panunzi, and Shleifer (2003) we empirically analyze how venture capital (VC) investments "standardize" family firms by transforming their corporate governance and top management. We find that family members are more likely to depart from management positions in VC backed compared to non VC backed firms. Further, family control rights, cash flow rights, and the separation between them drop more in VC backed firms. These effects are stronger when VCs have greater bargaining power or board representation. The above effects of VC backing are causal. We find that the standardization of VC backed family firms yields higher IPO firm valuation and post IPO operating performance.