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Investment, Duration, and Exit Strategies for Corporate and Independent Venture Capital-backed Start-ups

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  • Bing Guo
  • Yun Lou
  • David Pérez-Castrillo

Abstract

We propose a model of investment, duration, and exit strategies for start-ups backed by venture capital (VC) funds that accounts for the high level of uncertainty, the asymmetry of information between insiders and outsiders, and the discount rate. Our analysis predicts that start-ups backed by corporate VC funds remain for a longer period of time before exiting and receive larger investment amounts than those financed by independent VC funds. Although a longer duration leads to a higher likelihood of an exit through an acquisition, a larger investment increases the probability of an IPO exit. These predictions find strong empirical support.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 602.

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Date of creation: Jan 2012
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Handle: RePEc:bge:wpaper:602

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Keywords: Venture Capital Funds; Start-ups; IPO; Acquisition;

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  1. Steven N. Kaplan & Per Strömberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 513, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Thomas Hellmann & Laura Lindsey & Manju Puri, 2008. "Building Relationships Early: Banks in Venture Capital," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(2), pages 513-541, April.
  3. GIOT, Pierre & SCHWIENBACHER, Armin, 2005. "IPOs, trade sales and liquidations: modelling venture capital exits using survival analysis," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2005013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Inés Macho-Stadler & David Pérez-Castrillo, 2009. "Incentives in University Technology Transfers," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 785.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Siegel, Robin & Siegel, Eric & MacMillan, Ian C., 1988. "Corporate venture capitalists: Autonomy, obstacles, and performance," Journal of Business Venturing, Elsevier, vol. 3(3), pages 233-247.
  6. Masulis, Ronald W. & Nahata, Rajarishi, 2009. "Financial contracting with strategic investors: Evidence from corporate venture capital backed IPOs," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 18(4), pages 599-631, October.
  7. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(1), pages 133-156, September.
  8. Hellmann, Thomas, 2002. "A theory of strategic venture investing," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(2), pages 285-314, May.
  9. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1461-89, December.
  10. Douglas Cumming, 2008. "Contracts and Exits in Venture Capital Finance," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(5), pages 1947-1982, September.
  11. Paul A. Gompers & Josh Lerner, 1998. "The Determinants of Corporate Venture Capital Successes: Organizational Structure, Incentives, and Complementarities," NBER Working Papers 6725, National Bureau of Economic Research, Inc.
  12. Sykes, Hollister B., 1990. "Corporate venture capital: Strategies for success," Journal of Business Venturing, Elsevier, vol. 5(1), pages 37-47, January.
  13. Basu, Sandip & Phelps, Corey & Kotha, Suresh, 2011. "Towards understanding who makes corporate venture capital investments and why," Journal of Business Venturing, Elsevier, vol. 26(2), pages 153-171, March.
  14. Riyanto, Yohanes E. & Schwienbacher, Armin, 2006. "The strategic use of corporate venture financing for securing demand," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(10), pages 2809-2833, October.
  15. Hellmann, Thomas, 2006. "IPOs, acquisitions, and the use of convertible securities in venture capital," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(3), pages 649-679, September.
  16. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(4), pages 518-29, October.
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