Restarts of Venture Capital-Backed Firms: Evidence from the US Software Industry
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The venture capital (VC) industry is a game of"home runs," with a few lucrative exits compensating investors for the many ~'strike outs" along the way (Gompers and Lerner 2001). Consistent with this view, finance scholars report that VCs aggressively prune weaker startups in their investment portfolios to re-allocate resources to their more likely winners (Puri and Zarutski 2012). Using data on VC-backed software startups, I nonetheless find many numerous instances where distressed startups "restart" rather than cease operations. I investigate broader trends affecting the financing opportunities of software startups and compare characteristics of restart and non-restart firms within the sector. To complement this quantitative analysis, I conduct three case studies that illuminate the factors that could lead firms to be in a "restart situation" and the actions taken to tum around these fledgling companies.