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Waiting for the payday? The market for startups and the timing of entrepreneurial exit

Ashish Arora (), Andrea Fosfuri and Thomas Rønde

No 12724, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Most technology startups are set up for exit through acquisition by large corporations. In choosing when to sell, startups face a tradeoff. Early acquisitions reduce execution errors but later acquisitions improve the likelihood of finding a better match because there are fewer buyers in the early market as early acquisitions require costly absorptive capacity. Moreover, the decision of buyers to invest in absorptive capacity is related to the decision of startups on the timing of the exit sale. In this paper, we build a model to capture this complexity and the related tradeoffs. We find that the early market for startups is inefficiently thin when the timing of exit is a strategic choice, i.e. startups have to commit whether to go early or late. Too few startups are sold early and too few buyers invest in absorptive capacity. Venture capital paradoxically aggravates the inefficiency. Instead, when the timing of exit is a tactical choice, i.e., startups can choose to go late after observing the early offers, there are too many early acquisitions and too much investment in absorptive capacity by incumbents.

Keywords: absorptive capacity; Entrepreneurial exit; markets for technology (search for similar items in EconPapers)
JEL-codes: L26 O31 O33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent and nep-ino
Date: 2018-02
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