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Innovation and Venture Capital Exits

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  • Armin Schwienbacher

Abstract

This article analyses how start-ups financed by venture capital choose their innovation strategy based on the investor's exit preferences and thereby form different outcomes in the product market. It considers innovation choices and venture capital exits (IPO vs trade sale) in a setting in which entrepreneurs derive private benefits from staying independent, which is better guaranteed under an IPO. The entrepreneur has incentives to distort the innovation strategy in order to induce the venture capitalist to bring the company public. The analysis generates a number of empirical implications for the link between innovation, valuation, venture capital exit routes and market structure. Copyright © The Author(s). Journal compilation © Royal Economic Society 2008.

Suggested Citation

  • Armin Schwienbacher, 2008. "Innovation and Venture Capital Exits," Economic Journal, Royal Economic Society, vol. 118(533), pages 1888-1916, November.
    • Handle: RePEc:ecj:econjl:v:118:y:2008:i:533:p:1888-1916
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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