Optimal timing of venture capital-backed IPO

Donia Trabelsi () and Imen Mejri
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Donia Trabelsi: IMT-BS - DEFI - Département Droit, Économie et Finances - TEM - Télécom Ecole de Management - IMT - Institut Mines-Télécom [Paris] - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], KIND - Dynamique des réseaux, de l'innovation et de la connaissance - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], LITEM - Laboratoire en Innovation, Technologies, Economie et Management (EA 7363) - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris]
Imen Mejri: NEOMA - Neoma Business School

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Abstract: This paper investigates the optimal exit time for a venture capitalist (VC) through an initial public offering (IPO). We use a real options approach and develop a model based on the uncertainty of the VC-backed firm's cash flows. We assume that the VC sells his stake in two stages, i.e., at the IPO date (taking underpricing into account) and at the expiration of the lock-up period. We find a closed-form solution of the threshold at which it is optimal for the VC to exit and determine the expected first hitting time. Our main results show that more risk averse VC brings firms public earlier even if firm's cash flows are negative; the IPO is more rapid if the VC required rate of return and firm cash flows' volatility are high. However, underpricing does not play an important role in the VC decision regarding exit timing.

Keywords: Venture capital; Optimal Exit Timing; IPO; Underpricing; Lock-up period (search for similar items in EconPapers)
Date: 2020-09-04
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Published in World Finance Conference, Sep 2020, Malte (virtual conference), Malta

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02930921

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