Abstract:

Using data on the US population of biotech companies receiving formal venture capital over the period 1972-2002 and a Cox proportional hazard model, we find that, in face of a progressively exuberant market of the late 90s characterised by rising company values, shrinking round lengths, high birth rates of VC partnerships and an increasing tendency to float immature companies, businesses which were operationally more risky (being at earlier stages in their development) were, regardless of age, more likely to have their IPO accelerated. On the other hand, given the stage of development, more experienced VCs’ IPO strategy was progressively governed by caution: the greater the experience of the VC the greater the chance next period of an IPO for its investee company being postponed. This strategy likely reflects attempts by VCs to avoid reputational losses from bad timing and poor preparation in the headlong rush to market. It may also reflect anticipation of even higher valuations in the future. By contrast, we find that the alternative exit route for the VC, namely, a trade sale (TS), was unaffected by VC experience as the possibility of reputational loss would now be borne by the acquirer. The TS decision is found dominated by company age and stage effects, with Buyout prospects being the most attractive due to the rationalisation already carried out by VCs on the target companies.