The New Exit in Venture Capital
47 Pages Posted: 8 Oct 2010 Last revised: 9 Oct 2015
Date Written: October 7, 2010
Abstract
This Article examines a third exit option in venture capital to supplement IPOs and trade sales: secondary markets for the sale of individual ownership interests in start-ups and venture capital (VC) funds. While investors can readily buy shares in publicly-traded companies, until recently they have been unable to own a piece of private start-ups like Facebook or Twitter without working there or investing in exclusive VC funds. Now that venture capital has become a $400 billion worldwide asset class, however, start-up stock and limited partnership interests in VC funds have begun trading in private secondary markets. These secondary markets offer initial investors a new path to liquidity, offer buyers access to a previously untapped class of assets, and produce governance benefits for traded firms. The realization of these benefits in venture capital should lead to a net increase in the total amount of entrepreneurial activity. Given the surplus that entrepreneurial activity produces for society, VC secondary markets should be studied by academics and encouraged by policy makers. This Article is the first to study VC secondary markets and the issues they implicate in law and economics analysis. The Article examines VC secondary markets in their present state and contemplates their further development.
Keywords: Venture Capital, Exit, Lock In, Illiquidity, Secondary Market, Agency Costs, SharesPost, SecondMarket
JEL Classification: G24, G32, K22, M13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri