Venture Capital and Timing of IPO

Abstract:     
Our purpose is to find the optimal exit time of a venture capitalist (VC) under profit flow uncertainty. We consider that the VC sells his holding in two steps: at the offer price at the date of the initial public offering (IPO) taking into account the underpricing, then at the expiration of the lock-up period. We use a real options approach when the profit flow of the venture capital backed company follows an arithmetic Brownian motion. We find a closed-form solution of the threshold at which it is optimal for the VC to exit and also determine the expected first hitting time.

Number of Pages in PDF File: 22

Keywords: Venture capital, Real options, Timing of IPO, dynamic programming

JEL Classification: C61, D81, G11, G24

working papers series