Survey_NW_2002

Abstract

We are considering venture capitalists wanting to unwind their investment in one of their portfolio firms in the course of an initial public offering or at a later point in time. The venture capitalist has invested either in a good firm (the value of his investment is 1+ ? >1 ) or in a (relatively) “bad” firm.1 In the latter case the value of his investment is normalized to 1. The parameter ? therefore measures the degree of quality heterogeneity between the two types of firms and the ex-ante risk from the outside investors’ point of view, respectively. In order to simplify the set-up, we restrict the exit decision of the VC to two periods. Either the VCs sell their shares immediately during the IPO process (in t= 1) or they wait one further period and sell their investment in t= 2. There is an informational asymmetry in the sense that the VC (the inside investor) already knows the quality of their particular firm in t = 1, whereas the outside investors in the capital market only know the average percentage a of good firms. After one period, the investors in the capital market have learnt sufficiently much (e.g. through secondary market prices) to be able to distinguish a good from a bad project in t = 2.