Why do Some Venture Capitalists Cash Out While Others Retain their Stakes? -- How Fund Dynamics Influence Venture Capital Exit Decisions

Abstract

Although venture capital (VC) exits have been studied for over 20 years, major drivers are still in question. We examine the determinants of exit timing in initial public offerings (IPOs). The results from a proprietary dataset of 292 U.S. VC-backed IPOs from 1991 to 2008 imply that VC firm characteristics and fund dynamics have a significant influence on the exit extent and may not always be in line with limited partners’ interests. In particular, first-time funds keep their shares longer after an IPO, whereas funds satisfied with current fund performance cash out soon after the end of the lockup period.

Keywords: Venture Capital, IPO, Exit, General partner, Limited partner, Agency Theory, Prospect Theory

JEL Classification: G11, G24, G32