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Exit Returns and Venture Capital Investment Opportunities

42 Pages Posted: 13 Nov 2010  

Susan Chaplinsky

University of Virginia - Darden School of Business

Swasti Gupta-Mukherjee

Loyola University Chicago - Department of Finance

Date Written: September 17, 2010

Abstract

This study is the first to empirically construct exit returns - the return accruing to venture capitalists (VCs) from investments in portfolio companies - for a large sample of U.S. venture-backed companies. Exit returns are used (1) to document the size and trends in returns for specific investments that exit via an M&A or IPO during 1985-2008, and (2) to develop an "Exit-to-Failure Ratio" (EXF) to assess the strength of VCs’ investment opportunities in an industry. EXF measures the coverage exits provide to make up for failures that pose high reputational and financial risk to VCs. Outside of the Dotcom period, new investments initiated under higher EXF levels result in significantly higher future returns. Higher values of EXF also increase VCs’ risk appetite and their willingness to fund early stage companies. Our results show sharply diminished returns to VC investments over the sample period, which has resulted in a significant downward trend in VCs’ inclination to fund early stage companies. The finding raises concerns about the industry’s role in funding young, innovative companies if the trend persists.

Keywords: private equity, venture capital, investment performance, exits, IPOs

JEL Classification: G24

Suggested Citation

Chaplinsky, Susan and Gupta-Mukherjee, Swasti, Exit Returns and Venture Capital Investment Opportunities (September 17, 2010). Available at SSRN: https://ssrn.com/abstract=1707002 or http://dx.doi.org/10.2139/ssrn.1707002

Susan J. Chaplinsky (Contact Author)

University of Virginia - 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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