Investment, duration, and exit strategies for corporate and independent venture capital-backed start-ups

• Main Authors: GUO, Bing, LOU, Yun, PEREZ-CASTRILLO, David
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Corporate Finance; Entrepreneurial and Small Business Operations; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/soa_research/1696; https://ink.library.smu.edu.sg/context/soa_research/article/2723/viewcontent/jems12097__1_.pdf
• Institution: Singapore Management University

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.