IPOs, Trade Sales and Liquidations: Modelling Venture Capital Exits Using Survival Analysis

Using a detailed sample made up of more than 20,000 investment rounds, we analyze the time to ‘IPO’, ‘trade sale’ and ‘liquidation’ for about 6,000 venture backed firms. We model these exit times using competing risks models. Biotech and internet firms have the fastest IPO exits. Internet firms are also the fastest to liquidate, while biotech firms are however the slowest. The conditional probability for IPOs are clearly non-monotonous with respect to time. As time flows, venture capital-backed firms first exhibit an increased likelihood of exiting to an IPO. However, after having reached a plateau, investments that have not yet exited have fewer and fewer possibilities of IPO exits as time increases. The bubble period from 1998 to 2000 was an ‘easy money’ period where venture capitalists gave much more money to firms, many of which did not offer outstanding growth potential as they tended to liquidate much faster than in normal times.IPO, trade sale, venture capital, exit, survival analysis

On the Strategic Use of Corporate Venture Financing for Securing Demand

In this paper, we focus on the strategic role of corporate venture financing by a corporation in securing own demand. When the headquarter finances the venture through the corporate venture capitalist, he commits himself to compensate the venture for the effort to increase the complementarity between its product and the headquarter's product. The headquarter therefore faces the following trade-off: either be more aggressive ex post in the product market (by undercutting more its rivals) or use corporate venture financing to affect the venture's product innovation outcome to weaken ex post competition with substitute products. This allows him to secure demand for his own product.

Funding Dynamics in Crowdinvesting

We use hand-collected data from four German crowdinvesting portals to analyze what determines individual investment decisions in crowdinvesting. In contrast with the crowdfunding campaigns on Kickstarter, where the typical pattern of project support is U-shaped, we find crowdinvesting dynamics to be L-shaped. The evidence shows that backers base their investment decisions on information provided by the crowdinvesting portals as well as the behavior and comments of other investors. Furthermore, crowd investors engage in herding behaviour. These findings offer support for adequate information disclosure requirements that are consistent with ongoing regulatory reforms such as the JOBS Act in the United States, but that behavioral components may also affect investment decisions of the crowd

The Emergence of Crowdinvesting in Europe

This paper first presents the development of the crowdinvesting market in Europe since its start in 2007. Then, using hand-collected data on the complete set of crowdinvesting campaigns run in Germany, the paper shows that successful campaigns tend to be launched by new startups and when the minimum ticket size is small so that more crowd investors can participate. Moreover, the use of the partiarisches Darlehen (a specific form of equity-linked notes not subject to prospectus regulation) adopted at the end of 2012 in Germany (as a response to alleviating regulatory constraints) has led to larger amounts being raised but also campaigns becoming more likely to achieve their targets. These two results combined indicate that contractual arrangements that enable more participation from the crowd tend to work best. Finally, campaigns launched on portals already having some experience are more likely to raise larger amounts. These findings should be of use to entrepreneurs who need to choose among a larger range of different crowdinvesting portals

Should Securities Regulation Promote Crowdinvesting?

In this paper, we show that too strong investor protection may harm small firms and entrepreneurial initiatives, which contrasts with the traditional ‘law & finance’ view that stronger investor protection is better. This situation is particularly relevant in crowdinvesting, which refers to a recent financial innovation originating on the Internet and targets small, innovative firms. In many jurisdictions, securities regulation offers exemptions to prospectus and registration requirements. We provide an into-depth discussion of recent regulatory reforms in different countries and discuss how they may impact crowdinvesting. Building on a theoretical framework, we show that optimal regulation depends on the availability of alternative early-stage financing such as venture capital and angel finance. Finally, we offer exploratory portal-level evidence from Germany on the impact of securities regulation on small business finance

Funding dynamics in crowdinvesting

We use hand-collected data from four German crowdinvesting portals to analyze what determines individual investment decisions in crowdinvesting. In contrast with the crowdfunding campaigns on Kickstarter where the typical pattern of project support is U-shaped, we find crowdinvesting dynamics to be L-shaped under a first-come, first-serve mechanism and only U-shaped under a sealed-bid second-price auction. The evidence further shows that investors base their decisions on information provided by the entrepreneur in form of updates during the campaign and by the investment behavior and comments of other crowd investors. We also find evidence for herding behavior. As legislators around the world increasingly regulate crowdinvesting activities, knowing how crowd investors behave under no formal information disclosure provides important insights for issuers, portals, and lawmakers

Internationalization of business angel investments: The role of investor experience

In this study, we examine business angels (BAs)’ appetite for investing abroad and the role played by investment and entrepreneurial experience. To investigate BAs’ propensity to internationalize their investments, we study cross-border deals and culturally distant investments. Using an international sample of US and European BA deals, we find that both individual investment and entrepreneurial experience foster the internationalization of BAs’ investments, consistent with the predictions based upon the local bias theory. When splitting experience into domestic and foreign, we find that the former increases while the latter decreases local bias. When we separate US and European BAs, we find that the experiential background of BAs does not matter in the same way in Europe and in the US: while the general results are confirmed in Europe, both investment and entrepreneurial experience have a reduced impact in the US. We interpret these results in light of the reduced risk aversion of US BAs that lowers transaction costs

INNOVATION AND VENTURE CAPITAL EXITS

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

Should Securities Regulation Promote Equity Crowdfunding

In this paper, we show that too strong investor protection may harm small firms and entrepreneurial initiatives, which contrasts with the traditional “law and finance” view that stronger investor protection is better. This situation is particularly relevant in equity crowdfunding, which refers to a recent financial innovation originating on the Internet that targets small and innovative firms. In many jurisdictions, securities regulation offers exemptions to prospectus and registration requirements. We provide an into-depth discussion of recent regulatory reforms in different countries and discuss how they may impact equity crowdfunding. Building on a theoretical framework, we show that optimal regulation depends on the availability of an alternative early-stage financing such as venture capital and angel finance. Finally, we offer exploratory evidence from Germany on the impact of securities regulation on small business finance

The Emergence of Crowdinvesting in Europe

This paper first presents the development of the crowdinvesting market in Europe since its start in 2007. Then, using hand-collected data on the complete set of crowdinvesting campaigns run in Germany, the paper shows that successful campaigns tend to be launched by new startups and when the minimum ticket size is small so that more crowd investors can participate. Moreover, the use of the partiarisches Darlehen (a specific form of equity-linked notes not subject to prospectus regulation) adopted at the end of 2012 in Germany (as a response to alleviating regulatory constraints) has led to larger amounts being raised but also campaigns becoming more likely to achieve their targets. These two results combined indicate that contractual arrangements that enable more participation from the crowd tend to work best. Finally, campaigns launched on portals already having some experience are more likely to raise larger amounts. These findings should be of use to entrepreneurs who need to choose among a larger range of different crowdinvesting portals