Strategic exits in secondary venture capital markets

Guillaume Andrieu and Alexander Peter Groh

Journal of Business Venturing, 2021, vol. 36, issue 2

Abstract: The market for secondary venture capital transactions provides a way for investors to obtain liquidity if the investee start-up corporation has not yet reached sufficient maturity for an IPO. It also creates divestment opportunities for badly performing ventures that investors would rather abandon. We analyze the way in which the opportunistic behavior and liquidity constraints of venture capital funds channel deal flow into the secondary venture capital market. Such opportunistic behavior leads to the strategic exit of seed financing venture capitalists. These exits enlarge investors' opportunity set of strategies and therefore affect the deal terms with entrepreneurs. In this paper, we show that two contracts are possible in a world with financially constrained venture capital investors, staged investments, and premature divestment opportunities. Both contracts have their disadvantages. With the first, the venture capitalist will never liquidate a project, even if it is a lemon, but will instead engage in a secondary transaction. With the second contract, although lemons will be systematically abandoned, high-quality ventures may also be liquidated. Entrepreneurs need to consider these effects when aiming to maximize their benefits and must trade off the contract parameters accordingly. Our model provides guidance to entrepreneurs in this respect, helps to explain deal flow into the secondary venture capital market, and offers several empirical predictions.

Keywords: Secondary venture capital market; Entrepreneurial finance; Venture capital; Moral hazards (search for similar items in EconPapers)
JEL-codes: D81 G24 G32 L26 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0883902618309066
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbvent:v:36:y:2021:i:2:s0883902618309066

DOI: 10.1016/j.jbusvent.2019.105999

Access Statistics for this article

Journal of Business Venturing is currently edited by S. Venkataraman

More articles in Journal of Business Venturing from Elsevier
Bibliographic data for series maintained by Catherine Liu ().