Exit Choices of Venture-Backed Firms: IPO v. Acquisition

Abstract

We examine IPO and acquisition waves, exit choices, and pre-money valuations at exit for 7082 venture-backed private companies over the 19-year period from 1978 through 2006. Consistent with other literature, we hypothesize that levels of IPO and acquisition activity and the choice between IPO and acquisition may be affected by (i) market timing or investor sentiment, (ii) variations in the importance of information asymmetry, (iii) variations in the intensity of capital demand, and (iv) variations in the relative cost of the alternatives. Based on either the full sample, or sector-specific subsamples, we find that IPOs are selected during periods when market-wide demand for growth capital is high, adverse selection costs of equity issues are low, and the value of protecting private information is low. The evidence also is consistent with the view that IPO issuance is subject to high fixed cost compared to acquisition. We find no consistent support for the hypothesis that issuers are more likely to select IPOs during periods when the market is over-heated such that subsequent market returns are negative. Puzzlingly, acquisition activity does tend to peak before market declines. Evidence on the relation between pre-money value and exit activity indicates that adjustments in the IPO market are mainly to the numbers of firms going public whereas adjustments in the acquisition market are mainly to value.

Keywords: venture capital, IPO, acquisition, exit choice, market timing

JEL Classification: G14, G24, G32, G34