Based on the research “The Rise of Venture Capital and IPO Quality” by Amrita Nain, Jie Ying, and Joseph Arthur (2025)
A recent academic study has turned conventional wisdom on its head: more venture capital (VC) funding doesn’t always mean better investment opportunities—at least not for the public market. According to research by Amrita Nain, Jie Ying, and Joseph Arthur, published in June 2025, the rise of venture capital is quietly eroding the quality of companies going public via IPOs.
Using a blend of rigorous financial data analysis and a technique called shift-share instrumentation—based on how VC fundraising fluctuates nationally but impacts local markets—the researchers tracked how changes in VC supply influence the long-term quality and performance of IPOs. The results? A larger VC pie doesn’t mean more to go around for everyone—it means the best companies are staying private longer.
VCs Keep the Best for Themselves
When venture capital is abundant, VCs become highly selective. They pour money into the top-performing startups—those with the highest growth potential, best teams, and biggest markets. These firms then receive attractive private valuations and face no urgency to go public. As a result, the companies that do opt for IPOs during these times are, on average, of lower quality.
That lower quality isn’t just theoretical. The study found real-world consequences:
- Companies that went public during times of high VC supply showed lower operating profit margins and weaker sales growth in the years following their IPO.
- They were also more likely to fail. Firms launching IPOs during these periods had a higher chance of delisting within just two or three years—not because they were acquired, but because they couldn’t survive.
- Investors in these IPOs saw poorer stock performance, with average returns trailing behind benchmarks by nearly 10% in the first year.
Not All Companies Are Affected Equally
The damage isn’t spread evenly. The decline in IPO quality is especially sharp among firms where information asymmetry is high—companies in sectors like high-tech or biotech, or firms listed on NASDAQ, where public investors know less than private ones. In these industries, venture capitalists have far more insight into which startups are actually strong, and they often choose to keep those winners private as long as possible.
Why This Matters
In the past, going public was the natural next step for startups seeking growth. But as private funding has grown—ballooning from $32 billion in 2010 to $156 billion in 2020 in the U.S. alone—companies now raise larger rounds, stay private longer, and avoid the scrutiny that comes with public markets.
That leaves retail investors—so-called “main street” participants—locked out of early high-growth phases and left with later IPOs from companies that weren’t first choice material.
A Quiet Warning to Public Markets
This study explains why IPO quality may feel like it’s declining even as venture capital headlines boom. It also sheds light on policy debates: why the U.S. Securities and Exchange Commission (SEC) has expanded the definition of “accredited investor,” or why regulators are trying to give more people access to early-stage companies.
The irony is sharp: the more capital floods into venture investing, the less likely the public is to gain access to the startups that actually win. Instead, those firms quietly grow, exit through acquisitions, or list only when the best returns have already been captured—by private insiders.
Prepared by Navruzakhon Burieva
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