IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0111005.html
   My bibliography  Save this paper

Innovation And Venture Capital Exits

Author

Listed:
  • Armin SCHWIENBACHER

    (The University of Namur)

Abstract

This paper addresses the choice between different exit routes of venture capitalists for a project yielding a quality-improving product innovation. We explicitly introduce product market characteristics into the analysis with the aim to identify their effects on the optimal exit strategy and on the financial contract. Going public can be more profitable than a trade sale (i.e., selling the venture to an existing company) when the new product is sufficiently innovative. This leads to an agency conflict if the entrepreneur enjoys private benefits from staying an independent manager in the firm after the exit of the venture capitalist. The entrepreneur has incentives to distort the innovation strategy so as to make an IPO the preferred exit. We derive the optimal financing strategy under different allocations of control rights and market power. The use of an optimal mix of debt and equity can partially mitigate such a distortion. We also discuss empirical implications and offer partial empirical evidence.

Suggested Citation

  • Armin SCHWIENBACHER, 2001. "Innovation And Venture Capital Exits," Finance 0111005, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0111005
    Note: Type of Document -
    as

    Download full text from publisher

    File URL: http://econwpa.repec.org/eps/fin/papers/0111/0111005.pdf
    Download Restriction: no

    Citations

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


    Cited by:

    1. Ali-Yrkkö, Jyrki & Hyytinen, Ari & Liukkonen, Johanna, 2001. "Exiting Venture Capital Investments: Lessons from Finland," Discussion Papers 781, The Research Institute of the Finnish Economy.

    More about this item

    Keywords

    venture capital; innovation; entrepreneurship; exit; start-up; entrepreneurial finance; IPO; contract theory;

    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
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

    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:wpa:wuwpfi:0111005. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: http://econwpa.repec.org .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.