Government Contracting and Venture Capital Exit Outcomes

How does post-investment government contracting activity affect the exit outcomes of venture capital (VC) investments? While prior research highlights the role of government customers in shaping firm performance and information quality, little is known about how these dynamics influence VC-backed companies. Using a large sample of U.S. VC investments, we show that portfolio companies receiving government contracts after VC investment are more likely to achieve successful exits via initial public offerings (IPOs) or acquisitions and are less likely to be liquidated. The effect is moderated by suppliers' bargaining power with government agencies: firms with weaker bargaining power benefit more in IPO exits, while those with stronger bargaining power see greater improvements in acquisition and survival outcomes. The findings are robust to matching techniques, instrumental variable analysis, and hold across both reputable and non-reputable VC firms.