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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, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0111005
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    References listed on IDEAS

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    More about this item

    Keywords

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

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