We analyze the disinvestment decisions of venture capitalists in the course of an IPO of their portfolio firms. The capital market learns of the project quality only in the period following the IPO. Venture capitalists with high-quality firms must choose between immediately selling their stake in the venture at a price below the true value and waiting until the true value is revealed. We show that this choice is facilitated by a reputation-based mechanism in a repeated-game setting. This allows us to explain the phenomenon of “hot-issue market behavior” involving early disinvestments and a high degree of price uncertainty. In a further step, we provide a new rationale for underpricing. We show that young venture capitalists may use underpricing as a device for credibly committing themselves to establishing reputation.

We study the interaction between exit decisions and contract design in venture capital finance. One of the main characteristics of venture capital funds is that they need to divest their holdings in the portfolio firms after a limited period of time. However, venture capitalists and entrepreneurs often have diverging interests with respect to different exit solutions (e.g., IPOs or trade sales). We show that with convertible securities, the ex-ante agreed optimal exit policy can be implemented. Thereby, we give an explanation for the widespread use of convertible securities in venture capital finance.

We aim to extend the sparse knowledge on the financing dynamics of newly founded firms by investigating 2456 French manufacturing firms that were founded between 2004 and 2006. Our data comes from their legally required and reported financial statements. We observe significant heterogeneity in the financing decisions at foundation and analyze whether these differences widen or converge by using different convergence concepts. We consistently find β-convergence that indicates the initial financing decisions have a negative effect on the accumulation of this source of financing. After investigating the development of variation in financing patterns across firms over time (σ-convergence), we find mixed results. While differences in debt composition (e.g. role of trade credit, bank loans as well as relation between short and long-term debt) vanish over time the opposite is true for debt-equity mixes.

We investigate the role of venture-backing at the time of the initial public offering for the decision to subsequently be taken over and leave the exchange. We show, controlling for firm characteristics as well as the endogeneity of the involvement of VC, that VC-backed firms are significantly more likely to leave the exchange in the course of a take over. Our analysis sheds new light on decisions to go private, and even more so on the process of going public for VC-backed firms. Our findings suggest that, in a significant number of cases, VC-backed IPOs can be interpreted as delayed trade sales.