Ann Finance (2018) 14:1–47
Venture capital and underpricing: capacity constraints
and early sales
Received: 17 January 2017 / Accepted: 23 October 2017 / Published online: 8 November 2017
© Springer-Verlag GmbH Germany 2017
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 divest from ongoing projects 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; (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.
Keywords IPO · Venture capital · Underpricing · Capacity constraints
JEL Classiﬁcation G24 · G11
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