Survey_Tykvová_2003

Abstract

Our model consists of two periods, two types of firms (high- and low-quality) and (a) infinitely many possible kinds of projects that differ in the role of the non-monetary contribution by the venture capitalist in the basic model / (b) infinitely many possible experience levels of venture capital firms in the modified model. Each venture capitalist (VC) finances completely a single firm from the start of the first period when the firm is founded (t=0). Each firm carries out a single project. The value of the firm depends on its type, kind of project (the experience of the VC in the modified model) and VC’s monetary investment and non-monetary contribution. At the end of each period there are numerous new investors (NIs) who are interested in buying firms in public markets from the VCs. The issues we want to analyze are in which period a VC exits his investment and what divestment strategy he chooses. All VCs and NIs are risk neutral and rational investors. Further, we assume that: 1. the parameters, functional forms, structure of the game and players’ rationality are common knowledge among the players, 2. the venture capitalist chooses the strategy (timing, exit channel, price per share and number of shares sold at the IPO) that maximizes his profit given the known expectation formation by the NIs, 3. there are infinitely many new investors with identical and rational beliefs who in t=1 and t=2 are willing to pay a price per share that equals the share value they expect. The VC can exit his investment either after one (t=1) or after two (t=2) periods. He may choose one of the following options: to liquidate the firm, sell the entire firm at the time of the IPO or disinvest sequentially (sell a part of his shares at the end of the first period and the rest at the end of the second). The VC cannot retain any shares beyond t=2 since his investment horizon is limited to a maximum of two periods. The time structure is the following (see Figure 1): in t=0 the firm is founded and the venture capital financing starts, in t=1 the nature determines the type of firm and the kind of project and the VC gets this information, then, he has to decide whether or not he will continue to finance the firm until t=2. With the exception of projects with the lowest consulting intensity, the VC’s further monetary and non-monetary contribution in the second period increase the value of the H-firm (and, therefore, the price that NIs will be willing to pay).