Venture capital has become an increasingly important source of (private equity) funding for a significant number of innovative companies. It allows entrepreneurs to make bets on new markets often well before they form, and in a way which is not possible with other types of financing. From the point of view of the venture capitalist, it represents a quite illiquid investment for many years. Since most of these firms initially do not earn positive cash flows, the exit from the venture is the primary way how the venture capitalist can possibly realize a positive return on his investment. Thus, exit conditions are crucial for financing. It conditions all prior decisions. So far, only little attention has been devoted to explain how the decision on the type of exit is made by venture capitalists. Typically, five different exit routes are considered: trade sale (acquisition), public listing (IPO), management buy-out (MBO), refinancing (secondary sale), and liquidation.
The type of exit is not only an important issue for the venture capitalist, but also for the entrepreneur. The latter must be in clear that the venture capitalist will want to exit the venture in the future, and this most often means that the venture will be sold to another already operating company. If the entrepreneur nevertheless wants to keep the company afterwards and run it by his own, he will need to find the liquidity required to buy out the venture capitalist. Otherwise (and this is the general case), the venture is sold after few years to an existing firm. An exit strategy must therefore be developed; the identification of expected exit possibilities is an important part of the due diligence process that venture capitalists do before they decide to 'enter'.
The following research project aims at analyzing what drives the venture capitalist in his decision to exit a venture, and to which extent this is related to product market and capital market characteristics.