When should venture capitalists exit their investee companies?

Xun Li, Hwee Huat Tan, Craig Wilson and Zhenyu Wu

International Journal of Managerial Finance, 2013, vol. 9, issue 4, 351-364

Abstract: Purpose - – Exit strategies are critical for external private equity holders, such as venture capitalists and business angels, to receive investment returns successfully. The paper models the exit decision as a fixed date with the option to exit early, and develop an approach to help private equity holders determine an optimal early exit region based on a target equity value and the time remaining. Design/methodology/approach - – The paper sets up a continuous time model to derive analytical solutions and apply simulations to numerical examples in this study. Findings - – By numerically analyzing the nature of the solution the paper illustrates that a higher return drift of the investee company, a lower return volatility of the investee company, and a higher target return of the private equity holder results a smaller early exit region. Originality/value - – This study helps determine the optimal time of stopping investments, and provides venture capitalists with a usable way to make exit decisions.

Keywords: Venture capitalist; Exit strategy; Investee companies; Optimal control; Optimal stopping; Venture capital (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:9:y:2013:i:4:p:351-364

DOI: 10.1108/IJMF-01-2013-0003

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