Title: Innovation of Start-ups and Venture Capital Exits
Abstract: Contraposing start-ups' depth of innovation on the impact of the exit way of venture capital,considering venture capital's three-stages,and based on a vertical product differentiation market with linear demand functions.In this paper,we develop a model on exit decision to maximize profit of venture capitalists investing in the depth of innovation.The results show: when the new product is sufficiently innovative,going public can be more profitable than a trade sale(selling the venture to the existing company).This leads to an agency conflict if the entrepreneur enjoys private benefits from staying an independent manager in the company after the exit of the venture capitalist.Moreover,the entrepreneur has incentives to enhance the depth of innovation so as to make an IPO the preferred exit.We derive the optimal financing strategy under different allocations of control rights.The use of an optimal mix of debt and equity can partially mitigate such a conflict.
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: article
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Cited By Count: 1
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