Abstract

http://ssrn.com/abstract=2024309
 
 

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Investment Risk Allocation and the Venture Capital Exit Market


Susan Chaplinsky


University of Virginia - Darden School of Business

Swasti Gupta-Mukherjee


Loyola University Chicago - Department of Finance

March 2013


Abstract:     
The factors that drive the financing available to start-ups is a key issue for entrepreneurs, venture capitalists (VCs), and other investors in new ventures, especially in light of the difficult exit market the industry has faced over the last decade. We examine how the dollars gained and lost in recent exits and failures of venture-backed companies affect VCs’ risk allocations (proportion of early- versus late-stage investment) and returns over 1986-2008. Consistent with perceptions of lower profit-to-loss potential for risky investments, we find that VCs have significantly decreased the proportion of early stage investment over time. Conditional on exit, lower risk allocations at the time of investment initiation reduce the future returns from these exits, with its impact seemingly large enough to offset the positive effects of industry downsizing since 2001. In sum, we show empirically that risk allocation is an important channel by which VCs respond to market signals.

Number of Pages in PDF File: 47

Keywords: venture capital, early stage financing, risk, M&A, IPO

JEL Classification: G24

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Date posted: March 22, 2012 ; Last revised: May 25, 2013

Suggested Citation

Chaplinsky, Susan and Gupta-Mukherjee, Swasti, Investment Risk Allocation and the Venture Capital Exit Market (March 2013). Available at SSRN: http://ssrn.com/abstract=2024309 or http://dx.doi.org/10.2139/ssrn.2024309

Contact Information

Susan J. Chaplinsky (Contact Author)
University of Virginia (UVA) - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4810 (Phone)
434-243-7676 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/chaplinsky.htm
Swasti Gupta-Mukherjee
Loyola University Chicago - Department of Finance ( email )
820 North Michigan Avenue
Chicago, IL 60611
United States
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