Investment timing, risk, uncertainty, and return: Evidence from venture capital backed IPOs

51 Pages Posted: 22 Jun 2020 Last revised: 5 Mar 2021

See all articles by Sophie Manigart

Sophie Manigart

Vlerick Business School; Ghent University

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

Frederik Verplancke

Ghent University - Faculty of Economics and Business Administration; Tilburg University - Tilburg University School of Economics and Management

Date Written: November 30, 2020

Abstract

We explain the returns obtained on venture capital (VC) investments in all VC backed companies going public in the U.S. between 2003 and 2017. Using a unique data set of 1,921 investor-IPO returns, we show that later investments obtain higher returns, even after controlling for observed and unobserved IPO company and VC investor characteristics. This is counterintuitive as later investments are believed to be less risky than early investments because business risk declines as firms mature. We show that the positive relationship between investment timing and return can be explained by risks and uncertainty related to the exit, in this case IPO. High returns for late investments are obtained in more risky and uncertain IPOs and particularly by VC investors with high IPO reputation. We exclude other possible explanations, such as IPO ratchets for late investors, exit pressure due to short VC fund lifespan cycles, or unexpected funding needs before IPO that expropriate early investors.

Keywords: venture capital, investment timing, investment return, uncertainty, risk, IPO

JEL Classification: G11, G24

Suggested Citation

Manigart, Sophie and Mulier, Klaas and Verplancke, Frederik, Investment timing, risk, uncertainty, and return: Evidence from venture capital backed IPOs (November 30, 2020). Available at SSRN: https://ssrn.com/abstract=3612134 or http://dx.doi.org/10.2139/ssrn.3612134

Sophie Manigart

Vlerick Business School ( email )

Reep 1
Ghent, BE-9000
Belgium

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Frederik Verplancke (Contact Author)

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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