Venture capital and underpricing: capacity constraints and early sales

Venture capital and underpricing: capacity constraints and early sales 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annals of Finance Springer Journals

Venture capital and underpricing: capacity constraints and early sales

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Publisher
Springer Journals
Copyright
Copyright © 2017 by Springer-Verlag GmbH Germany
Subject
Finance; Finance, general; Economic Theory/Quantitative Economics/Mathematical Methods; Quantitative Finance; Macroeconomics/Monetary Economics//Financial Economics
ISSN
1614-2446
eISSN
1614-2454
D.O.I.
10.1007/s10436-017-0311-2
Publisher site
See Article on Publisher Site

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.

Journal

Annals of FinanceSpringer Journals

Published: Nov 8, 2017

References

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