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Preplanned exit strategies in venture capital

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  • Cumming, Douglas
  • Johan, Sofia Atiqah binti

Abstract

This paper empirically considers the role of preplanned exits (the investor's initial strategy to sell the investee firm via an acquisition or an initial public offering (IPO) at the time of initial contract with the entrepreneur), legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance. We introduce a sample of 223 entrepreneurial investee firms financed by 35 venture capital funds in 11 continental European countries, and these data indicate the following. First, preplanned acquisition exits are associated with stronger investor veto and control rights, a greater probability that convertible securities will be used, and a lower probability that common equity will be used; the converse is observed for preplanned IPOs. Second, investors take fewer control and veto rights and use common equity in countries of German legal origin, relative to Socialist, Scandinavian, and French legal origin. Third, more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity, while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity.

Suggested Citation

  • Cumming, Douglas & Johan, Sofia Atiqah binti, 2008. "Preplanned exit strategies in venture capital," European Economic Review, Elsevier, vol. 52(7), pages 1209-1241, October.
  • Handle: RePEc:eee:eecrev:v:52:y:2008:i:7:p:1209-1241
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    References listed on IDEAS

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    Cited by:

    1. Joseph McCahery & Erik Vermeulen, 2012. "Private equity regulation: a comparative analysis," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(2), pages 197-233, May.
    2. Inci, Eren & Barlo, Mehmet, 2010. "Banks versus venture capital when the venture capitalist values private benefits of control," MPRA Paper 25566, University Library of Munich, Germany.
    3. repec:eee:eecrev:v:101:y:2018:i:c:p:459-478 is not listed on IDEAS
    4. Henry Lahr & Andrea Mina, 2014. "Liquidity, Technological Opportunities, and the Stage Distribution of Venture Capital Investments," Financial Management, Financial Management Association International, vol. 43(2), pages 291-325, June.
    5. repec:eee:finlet:v:22:y:2017:i:c:p:146-152 is not listed on IDEAS
    6. Johan, Sofia & Zhang, Minjie, 2016. "Private equity exits in emerging markets," Emerging Markets Review, Elsevier, vol. 29(C), pages 133-153.
    7. Amitrajeet Batabyal, 2010. "An analysis of adverse selection, entrepreneurial activity, and the decision to go public," Letters in Spatial and Resource Sciences, Springer, vol. 3(2), pages 79-90, July.
    8. Borgonovo, Emanuele & Gatti, Stefano, 2013. "Risk analysis with contractual default. Does covenant breach matter?," European Journal of Operational Research, Elsevier, vol. 230(2), pages 431-443.
    9. Julia Hirsch & Uwe Walz, 2013. "Why do contracts differ between venture capital types?," Small Business Economics, Springer, vol. 40(3), pages 511-525, April.
    10. Arturo Haro-de-Rosario & María del Carmen Caba-Pérez & Leonardo Cazorla-Papis, 2016. "The impact of venture capital on investee companies: evidence from Spain," Review of Managerial Science, Springer, vol. 10(3), pages 577-600, July.
    11. Fabrizi, Simona & Lippert, Steffen & Norback, Pehr-Johan & Persson, Lars, 2007. "Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process," MPRA Paper 6265, University Library of Munich, Germany.
    12. Guerini, Massimiliano & Quas, Anita, 2016. "Governmental venture capital in Europe: Screening and certification," Journal of Business Venturing, Elsevier, vol. 31(2), pages 175-195.
    13. Simona Fabrizi & Steffen Lippert & Pehr-Johan Norbäck & Lars Persson, 2013. "Venture Capitalists and the Patenting of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 623-659, September.
    14. Masulis, Ronald W. & Nahata, Rajarishi, 2009. "Financial contracting with strategic investors: Evidence from corporate venture capital backed IPOs," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 599-631, October.
    15. Sunny Hahn & Jina Kang, 2017. "Complementary or conflictory?: the effects of the composition of the syndicate on venture capital-backed IPOs in the US stock market," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 44(1), pages 77-102, March.
    16. Douglas Cumming & Sofia Johan, 2013. "The IPO as an exit strategy for venture capitalists: regional lessons from Canada with international comparisons," Chapters,in: Handbook of Research on IPOs, chapter 21, pages 465-502 Edward Elgar Publishing.
    17. Ann-Kristin Achleitner & Reiner Braun & Eva Lutz & Uwe Reiner, 2014. "Industry relatedness in trade sales and venture capital investment returns," Small Business Economics, Springer, vol. 43(3), pages 621-637, October.
    18. Federico Munari & Einar Rasmussen & Laura Toschi & Elisa Villani, 2016. "Determinants of the university technology transfer policy-mix: a cross-national analysis of gap-funding instruments," The Journal of Technology Transfer, Springer, vol. 41(6), pages 1377-1405, December.
    19. Gill, Andrej & Walz, Uwe, 2016. "Are VC-backed IPOs delayed trade sales?," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 356-374.
    20. repec:eee:pacfin:v:43:y:2017:i:c:p:107-123 is not listed on IDEAS
    21. Cumming, Douglas & Dai, Na, 2010. "Local bias in venture capital investments," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 362-380, June.
    22. Gill, Andrej & Walz, Uwe, 2012. "Going public - going private: The case of VC-backed firms," CFS Working Paper Series 2012/02, Center for Financial Studies (CFS).
    23. repec:eee:jbfina:v:87:y:2018:i:c:p:333-350 is not listed on IDEAS
    24. Espenlaub, Susanne & Khurshed, Arif & Mohamed, Abdulkadir, 2015. "Venture capital exits in domestic and cross-border investments," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 215-232.
    25. Mariarosa Scarlata & Luisa Alemany, 2010. "Deal Structuring in Philanthropic Venture Capital Investments: Financing Instrument, Valuation and Covenants," Journal of Business Ethics, Springer, vol. 95(2), pages 121-145, September.

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