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Strategic exits in secondary venture capital markets

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  • Andrieu, Guillaume
  • Peter Groh, Alexander

Abstract

The market for secondary venture capital transactions provides a way for investors to obtain liquidity if the investee start-up corporation has not yet reached sufficient maturity for an IPO. It also creates divestment opportunities for badly performing ventures that investors would rather abandon. We analyze the way in which the opportunistic behavior and liquidity constraints of venture capital funds channel deal flow into the secondary venture capital market. Such opportunistic behavior leads to the strategic exit of seed financing venture capitalists. These exits enlarge investors' opportunity set of strategies and therefore affect the deal terms with entrepreneurs. In this paper, we show that two contracts are possible in a world with financially constrained venture capital investors, staged investments, and premature divestment opportunities. Both contracts have their disadvantages. With the first, the venture capitalist will never liquidate a project, even if it is a lemon, but will instead engage in a secondary transaction. With the second contract, although lemons will be systematically abandoned, high-quality ventures may also be liquidated. Entrepreneurs need to consider these effects when aiming to maximize their benefits and must trade off the contract parameters accordingly. Our model provides guidance to entrepreneurs in this respect, helps to explain deal flow into the secondary venture capital market, and offers several empirical predictions.

Suggested Citation

  • Andrieu, Guillaume & Peter Groh, Alexander, 2021. "Strategic exits in secondary venture capital markets," Journal of Business Venturing, Elsevier, vol. 36(2).
    • Handle: RePEc:eee:jbvent:v:36:y:2021:i:2:s0883902618309066
    DOI: 10.1016/j.jbusvent.2019.105999
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    References listed on IDEAS

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    More about this item

    Keywords

    Secondary venture capital market; Entrepreneurial finance; Venture capital; Moral hazards;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • 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
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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