THE JOURNAL OF FINANCE • VOL. LXIV, NO.

1 • FEBRUARY 2009

Should Investors Bet on the Jockey or the Horse?

Evidence from the Evolution of Firms from Early
Business Plans to Public Companies

STEVEN N. KAPLAN, BERK A. SENSOY, and PER STRÖMBERG∗

ABSTRACT
We study how firm characteristics evolve from early business plan to initial public of-
fering (IPO) to public company for 50 venture capital (VC)-financed companies. Firm
business lines remain remarkably stable while management turnover is substantial.
Management turnover is positively related to alienable asset formation. We obtain
similar results using all 2004 IPOs, suggesting that our main results are not specific
to VC-backed firms or the time period. The results suggest that, at the margin, in-
vestors in start-ups should place more weight on the business (“the horse”) than on
the management team (“the jockey”). The results also inform theories of the firm.

SINCE COASE (1937), ECONOMISTS HAVE ATTEMPTED TO UNDERSTAND why firms exist
and what constitutes firms.1 Despite the long history of theory and empirical
work, there is little systematic or noncase evidence concerning what constitutes
a firm when it is very young and how a young firm evolves to a mature company.
In this paper, we provide such evidence by studying 50 venture capital (VC)-
financed firms from early business plan to initial public offering (IPO) to public
company (3 years after the IPO). We explore financial performance, line of
business, point(s) of differentiation, nonhuman capital assets, growth strategy,

∗ Kaplan is with the University of Chicago Graduate School of Business and the National Bu-
reau of Economic Research, Sensoy is with the University of Southern California, and Strömberg
is with the Swedish Institute for Financial Research. This research has been supported by the
Kauffman Foundation, the Lynde and Harry Bradley Foundation, the Olin Foundation through
grants to the Center for the Study of the Economy and the State, and by the Center for Research
in Security Prices. We thank the venture capital partnerships for providing data, and Sol Garger
and Nick Kramvis for excellent research assistance. We also thank Andres Almazan, Ulf Axelson,
George Baker, Ola Bengtsson, Effi Benmelech, Patrick Bolton, Connie Capone, Bruno Cassiman,
Zsuzsanna Fluck, John Graham, Oliver Hart, Cam Harvey, Thomas Hellmann, Bengt Holmström,
Mark Koulegeorge, Augustin Landier, Josh Lerner, Andrew Metrick, John Oxaal, Jeremy Stein,
Toby Stuart, Krishnamurthy Subramanian, Lucy White, Luigi Zingales, two anonymous referees,
and seminar participants at BI, the Center for Economic Policy Research Summer Symposium at
Gerzensee, Columbia, Cornell, Federal Reserve Bank of New York, Harvard, Hebrew University,
Kellogg, Mannheim, Michigan, NBER Corporate Finance Group, NBER Entrepreneurship Group,
RICAFE Conference in Turin, SIFR, Stockholm School of Economics, Tel Aviv University, Tilburg
University, The Tuck School (at Dartmouth), University of Chicago, University of Vienna, and
University of Wisconsin for helpful comments.
1
Both Holmström and Roberts (1998) and Gibbons (2005) describe and summarize some of this
work.

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