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A dynamic model for venture capitalists’ entry–exit investment decisions

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  • Ferreira, Ricardo M.
  • Pereira, Paulo J.

Abstract

In this paper, we develop a dynamic model to study the entry and the exit decision for a VC facing the opportunity to invest and expand a start-up firm. Two settings are considered. A benchmark-setting, where no time constraints for exiting are in place, is compared with the one where, realistically, the VC has a finite time-window to disinvest. In both cases, we consider the trade sale (M&A) as the exit route. The model returns the entry and the exit triggers, the optimal post-money ownerships, the expected cash multiple for the VC, and also proposes a new time-adjusted version of the cash multiple, useful for measuring, ex-ante, the expected performance of the investment. The model aims to guide the VCs when analyzing their investment opportunities, considering the entire VC’s business-cycle (entry–expand–exit). Finally, the model is applied to a hypothetical, but realistic, situation in order to discuss the main outcomes. A comparative statics analysis is also performed.

Suggested Citation

  • Ferreira, Ricardo M. & Pereira, Paulo J., 2021. "A dynamic model for venture capitalists’ entry–exit investment decisions," European Journal of Operational Research, Elsevier, vol. 290(2), pages 779-789.
    • Handle: RePEc:eee:ejores:v:290:y:2021:i:2:p:779-789
    DOI: 10.1016/j.ejor.2020.08.014
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    2. Michi NISHIHARA, 2021. "How should a startup respond to acquirers? A real options analysis," Discussion Papers in Economics and Business 20-24, Osaka University, Graduate School of Economics.
    3. Yanzhao Li & Ju-e Guo & Shaolong Sun & Yongwu Li, 2022. "How time-inconsistent preferences influence venture capital exit decisions? A new perspective for grandstanding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-24, December.

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    More about this item

    Keywords

    Finance; Venture capital; Start-ups; Real options; Growth options;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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