Optimal timing of venture capital-backed IPO

Abstract

International audienceThis paper investigates the optimal exit time for a venture capitalist (VC) through an initial public offering (IPO). We use a real options approach and develop a model based on the uncertainty of the VC-backed firm’s cash flows. We assume that the VC sells his stake in two stages, i.e., at the IPO date (taking underpricing into account) and at the expiration of the lock-up period. We find a closed-form solution of the threshold at which it is optimal for the VC to exit and determine the expected first hitting time. Our main results show that more risk averse VC brings firms public earlier even if firm’s cash flows are negative; the IPO is more rapid if the VC required rate of return and firm cash flows’ volatility are high. However, underpricing does not play an important role in the VC decision regarding exit timing