IDEAS home Printed from https://ideas.repec.org/p/bge/wpaper/602.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Bing Guo & Yun Lou & David Pérez-Castrillo, 2012. "Investment, Duration, and Exit Strategies for Corporate and Independent Venture Capital-backed Start-ups," Working Papers 602, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:602
    as

    Download full text from publisher

    File URL: https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/602.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Julian Atanassov, 2013. "Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting," Journal of Finance, American Finance Association, vol. 68(3), pages 1097-1131, June.
    2. Annamaria Conti & Marie Thursby & Frank T. Rothaermel, 2013. "Show Me the Right Stuff: Signals for High‐Tech Startups," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 341-364, June.
    3. Macho-Stadler, Inés & Pérez-Castrillo, David, 2010. "Incentives in university technology transfers," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 362-367, July.
    4. Klaus M. Schmidt, 2003. "Convertible Securities and Venture Capital Finance," Journal of Finance, American Finance Association, vol. 58(3), pages 1139-1166, June.
    5. Paul Gompers & Josh Lerner, 2000. "The Determinants of Corporate Venture Capital Success: Organizational Structure, Incentives, and Complementarities," NBER Chapters, in: Concentrated Corporate Ownership, pages 17-54, National Bureau of Economic Research, Inc.
    6. Elisabete Gomes Santana F�lix & Cesaltina Pacheco Pires & Mohamed Azzim Gulamhussen, 2014. "The exit decision in the European venture capital market," Quantitative Finance, Taylor & Francis Journals, vol. 14(6), pages 1115-1130, June.
    7. Thomas Hellmann & Laura Lindsey & Manju Puri, 2008. "Building Relationships Early: Banks in Venture Capital," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 513-541, April.
    8. 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, vol. 20(4), pages 518-529, October.
    9. repec:cup:jfinqa:v:46:y:2011:i:06:p:1755-1793_00 is not listed on IDEAS
    10. Morck, Randall K. (ed.), 2000. "Concentrated Corporate Ownership," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226536781.
    11. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    12. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-b.
    13. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-a.
    14. Bronwyn H. Hall & Adam B. Jaffe & Manuel Trajtenberg, 2001. "The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools," NBER Working Papers 8498, National Bureau of Economic Research, Inc.
    15. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    16. 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.
    17. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    18. Gompers, Paul A, 1995. "Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-1489, December.
    19. Bayar, Onur & Chemmanur, Thomas J., 2011. "IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1755-1793, December.
    20. Hellmann, Thomas, 2006. "IPOs, acquisitions, and the use of convertible securities in venture capital," Journal of Financial Economics, Elsevier, vol. 81(3), pages 649-679, September.
    21. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    22. Sykes, Hollister B., 1990. "Corporate venture capital: Strategies for success," Journal of Business Venturing, Elsevier, vol. 5(1), pages 37-47, January.
    23. Giot, Pierre & Schwienbacher, Armin, 2007. "IPOs, trade sales and liquidations: Modelling venture capital exits using survival analysis," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 679-702, March.
    24. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    25. Gary Dushnitsky & Zur Shapira, 2010. "Entrepreneurial finance meets organizational reality: comparing investment practices and performance of corporate and independent venture capitalists," Strategic Management Journal, Wiley Blackwell, vol. 31(9), pages 990-1017, September.
    26. Bayar, Onur & Chemmanur, Thomas J., 2012. "What drives the valuation premium in IPOs versus acquisitions? An empirical analysis," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 451-475.
    27. Riyanto, Yohanes E. & Schwienbacher, Armin, 2006. "The strategic use of corporate venture financing for securing demand," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2809-2833, October.
    28. Annette B. Poulsen & Mike Stegemoller, 2008. "Moving from Private to Public Ownership: Selling Out to Public Firms versus Initial Public Offerings," Financial Management, Financial Management Association International, vol. 37(1), pages 81-101, March.
    29. Bergemann, Dirk & Hege, Ulrich, 1998. "Venture capital financing, moral hazard, and learning," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 703-735, August.
    30. Douglas Cumming, 2008. "Contracts and Exits in Venture Capital Finance," The Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1947-1982, September.
    31. 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.
    32. Luigi Zingales, 1995. "Insider Ownership and the Decision to Go Public," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(3), pages 425-448.
    33. Hellmann, Thomas, 2002. "A theory of strategic venture investing," Journal of Financial Economics, Elsevier, vol. 64(2), pages 285-314, May.
    34. Corey C. Phelps & Sandip Basu & Suresh Kotha, 2011. "Towards understanding who makes corporate venture capital investments and why," Post-Print hal-00575634, HAL.
    35. Gompers, Paul A., 1996. "Grandstanding in the venture capital industry," Journal of Financial Economics, Elsevier, vol. 42(1), pages 133-156, September.
    36. Vladimir I. Ivanov & Fei Xie, 2010. "Do Corporate Venture Capitalists Add Value to Start‐Up Firms? Evidence from IPOs and Acquisitions of VC‐Backed Companies," Financial Management, Financial Management Association International, vol. 39(1), pages 129-152, March.
    37. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Banal-Estañol, Albert & Macho-Stadler, Inés & Nieto-Postigo, Jonás & Pérez-Castrillo, David, 2023. "Early individual stakeholders, first venture capital investment, and exit in the UK startup ecosystem," Journal of Corporate Finance, Elsevier, vol. 80(C).
    3. Maxin, Hannes, 2018. "The Corporate Venture Capital Exit Decision," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181647, Verein für Socialpolitik / German Economic Association.
    4. Ji Youn (Rose) Kim & Haemin Dennis Park, 2017. "Two Faces of Early Corporate Venture Capital Funding: Promoting Innovation and Inhibiting IPOs," Strategy Science, INFORMS, vol. 2(3), pages 161-175, September.
    5. Rehnen, Lena Marie, 2016. "Exit strategies of loyalty programs," jbm - Journal of Business Market Management, Free University Berlin, Marketing Department, vol. 9(1), pages 564-596.
    6. Shuwaikh, Fatima & Dubocage, Emmanuelle, 2022. "Access to the Corporate Investors' Complementary Resources: A Leverage for Innovation in Biotech Venture Capital-Backed Companies," Technological Forecasting and Social Change, Elsevier, vol. 175(C).
    7. Carolin Bock & Christian Hackober, 2020. "Unicorns—what drives multibillion-dollar valuations?," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 949-984, November.
    8. Antonio Meles & Stefano Monferr� & Vincenzo Verdoliva, 2014. "Do the effects of private equity investments on firm performance persist over time?," Applied Financial Economics, Taylor & Francis Journals, vol. 24(3), pages 203-218, February.
    9. Eric Braune & Jean-Sebastien Lantz & Jean-Michel Sahut & Frédéric Teulon, 2019. "Corporate venture capital in the IT sector and relationships in VC syndication networks," Post-Print hal-02467749, HAL.
    10. Rossi, Matteo & Chouaibi, Jamel & Graziano, Domenico & Festa, Giuseppe, 2022. "Corporate venture capitalists as entrepreneurial knowledge accelerators in global innovation ecosystems," Journal of Business Research, Elsevier, vol. 142(C), pages 512-523.
    11. Eric Braune & Jean-Sébastien Lantz & Jean-Michel Sahut & Frédéric Teulon, 2021. "Corporate venture capital in the IT sector and relationships in VC syndication networks," Post-Print hal-03497346, HAL.
    12. Jintong Tang & Zhi Tang & Renhong Zhu & Xinchun Li, 2021. "Entrepreneurs’ resource background, innovation, philanthropy and the exit of external Investment in Private Ventures in China," Asia Pacific Journal of Management, Springer, vol. 38(2), pages 467-489, June.
    13. Fatima Shuwaikh & Mathew Hughes & Souad Brinette & Sabrina Khemiri, 2024. "Investment decisions under uncertainty: Corporate venture capital as a real option," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2452-2471, April.
    14. Jeon, Euiju & Maula, Markku, 2022. "Progress toward understanding tensions in corporate venture capital: A systematic review," Journal of Business Venturing, Elsevier, vol. 37(4).
    15. Yeon, Soojung, 2018. "How to be acquired by Google?: Analysis of target firms acquired by Google Inc," 22nd ITS Biennial Conference, Seoul 2018. Beyond the boundaries: Challenges for business, policy and society 190396, International Telecommunications Society (ITS).
    16. Patrick Röhm, 2018. "Exploring the landscape of corporate venture capital: a systematic review of the entrepreneurial and finance literature," Management Review Quarterly, Springer, vol. 68(3), pages 279-319, August.
    17. Eric Braune & Jean-Sébastien Lantz & Jean-Michel Sahut & Frédéric Teulon, 2021. "Corporate venture capital in the IT sector and relationships in VC syndication networks," Small Business Economics, Springer, vol. 56(3), pages 1221-1233, February.
    18. Tereza Tykvová, 2018. "Venture capital and private equity financing: an overview of recent literature and an agenda for future research," Journal of Business Economics, Springer, vol. 88(3), pages 325-362, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    2. Maxin, Hannes, 2018. "The Corporate Venture Capital Exit Decision," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181647, Verein für Socialpolitik / German Economic Association.
    3. 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.
    4. Banal-Estañol, Albert & Macho-Stadler, Inés & Nieto-Postigo, Jonás & Pérez-Castrillo, David, 2023. "Early individual stakeholders, first venture capital investment, and exit in the UK startup ecosystem," Journal of Corporate Finance, Elsevier, vol. 80(C).
    5. Patrick Röhm & Andreas Köhn & Andreas Kuckertz & Hermann S. Dehnen, 2018. "A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation," Journal of Business Economics, Springer, vol. 88(3), pages 531-557, May.
    6. Jeon, Euiju & Maula, Markku, 2022. "Progress toward understanding tensions in corporate venture capital: A systematic review," Journal of Business Venturing, Elsevier, vol. 37(4).
    7. Jens Burchardt & Ulrich Hommel & Dzidziso Samuel Kamuriwo & Carolina Billitteri, 2016. "Venture Capital Contracting in Theory and Practice: Implications for Entrepreneurship Research," Entrepreneurship Theory and Practice, , vol. 40(1), pages 25-48, January.
    8. Patrick Röhm, 2018. "Exploring the landscape of corporate venture capital: a systematic review of the entrepreneurial and finance literature," Management Review Quarterly, Springer, vol. 68(3), pages 279-319, August.
    9. Massimo G. Colombo & Samuele Murtinu, 2017. "Venture Capital Investments in Europe and Portfolio Firms' Economic Performance: Independent Versus Corporate Investors," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 26(1), pages 35-66, February.
    10. Bottazzi, Laura & Da Rin, Marco & Hellmann, Thomas, 2008. "Who are the active investors?: Evidence from venture capital," Journal of Financial Economics, Elsevier, vol. 89(3), pages 488-512, September.
    11. Wang, Lanfang & Wang, Susheng, 2011. "Cross-border venture capital performance: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 71-97, January.
    12. Andrew Metrick & Ayako Yasuda, 2011. "Venture Capital and Other Private Equity: a Survey," European Financial Management, European Financial Management Association, vol. 17(4), pages 619-654, September.
    13. Wang, Lanfang & Wang, Susheng, 2012. "Economic freedom and cross-border venture capital performance," Journal of Empirical Finance, Elsevier, vol. 19(1), pages 26-50.
    14. Miglo, Anton, 2022. "Theories of financing for entrepreneurial firms: a review," MPRA Paper 115835, University Library of Munich, Germany.
    15. Obrimah, Oghenovo A., 2016. "How important is innovation for venture capitalists’ (VCs’) market reputation?," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 64-76.
    16. Hirsch, Julia & Walz, Uwe, 2006. "Why do contracts differ between VC types? Market segmentation versus corporate governance varieties," CFS Working Paper Series 2006/12, Center for Financial Studies (CFS).
    17. Nahata, Rajarishi, 2019. "Success is good but failure is not so bad either: Serial entrepreneurs and venture capital contracting," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 624-649.
    18. Suting Hong & Konstantinos Serfes & Veikko Thiele, 2020. "Competition in the venture capital market and the success of startup companies: Theory and evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 741-791, October.
    19. Thomas Standaert & Sophie Manigart, 2018. "Government as fund-of-fund and VC fund sponsors: effect on employment in portfolio companies," Small Business Economics, Springer, vol. 50(2), pages 357-373, February.
    20. Chortareas, Georgios E. & Girardone, Claudia & Ventouri, Alexia, 2013. "Financial freedom and bank efficiency: Evidence from the European Union," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1223-1231.

    More about this item

    Keywords

    Venture Capital Funds; Start-ups; IPO; acquisition;
    All these keywords.

    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
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:602. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bruno Guallar (email available below). General contact details of provider: https://edirc.repec.org/data/bargses.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.