VCT Skill and Deal Structure vs. Luck: What Drives the Success of VCT-Backed Firms

In this study, we document the importance of Venture Capital Trust (VCT) funding to small, young and risky firms’ in the U.K. At a minimum, the VCT scheme is important given that it increases the supply of capital to small, young, and risky firms. Using this as a starting point, we ask whether VCT skills and the funding deal structure or luck determines the success of VCT-backed firms. Beyond the increased supply of capital to small, young and risky firms, do VCT skills and the funding deal structure determine the success of VCT-backed firms? With the aid of a Deep Neural Network Binary Classification model, a Deep Neural Network Regression model, and several attribution algorithms, we quantify the relative importance of VCT skills and the funding deal structure for the success of VCT-backed firms. We find that VCT skills and the funding deal structure are significant determinants of the success of VCT-backed firms. Specifically, prior high financial performance is the most important VCT skill determinant of the success of VC-backed firms, contributing an average of 13% to the success of VCT-backed firms.