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Venture Capital and Underpricing: Capacity Constraints and Early Sales

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  • Roberto Pinheiro

Abstract

I present a model of the venture capital (VC) and public markets in which VCs suffer from capacity constraints, due to the shortage of skilled VC managers. Consequently, VC firms can only handle a limited number of new projects at once, having to take ongoing projects public in order to take advantage of new opportunities. This framework is able to match key features presented by the VC and initial public offer (IPO) empirical literatures: (1) VC-backed firms are younger, smaller, and less profitable at the IPO than their non-VC backed counterparts; (2) VC-backed IPOs are more underpriced than non-VC backed ones; (3) There is a positive relationship between underpricing and VC fundraising; (4) Small and young VC firms usually take portfolio firms public earlier than their large and mature counterparts; and (5) In hot IPO markets, VCs are more likely to take public both very young and small firms as well as mature and large firms, compared to cold markets. Differently, non-VC backed firms are usually smaller and younger in hot markets than in cold ones.

Suggested Citation

  • Roberto Pinheiro, 2016. "Venture Capital and Underpricing: Capacity Constraints and Early Sales," Working Papers (Old Series) 1624, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1624
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    Cited by:

    1. Yung, Chris, 2019. "Entrepreneurial manipulation with staged financing," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 273-282.
    2. Eeckhout, Jan & Kircher, Philipp, 2010. "Sorting versus screening: Search frictions and competing mechanisms," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1354-1385, July.
    3. Hector Chade & Jan Eeckhout & Lones Smith, 2017. "Sorting through Search and Matching Models in Economics," Journal of Economic Literature, American Economic Association, vol. 55(2), pages 493-544, June.
    4. Chris Yung, 2017. "Venture Capital and the Market for Talent during Booms and Busts," Review of Finance, European Finance Association, vol. 21(5), pages 1875-1899.

    More about this item

    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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