The Venture Capital Revolution

Abstract

Venture capital has emerged as an important intermediary in financial markets, providing capital to young high-technology firms that might have otherwise gone unfunded. Venture capitalists have developed a variety of mechanisms to overcome the problems that emerge at each stage of the investment process. At the same time, the venture capital process is also subject to various pathologies from time to time, which can create problems for investors or entrepreneurs. This article reviews the recent empirical literature on these organizations and points out area where further research is needed.

Shareholder Lock-in Contracts: Share Price and Trading Volume Effects at the Lock-in Expiry

“…We find that VCs tend to use the first opportunity to sell a significant part of their holdings. This is in line with the statement by Gompers and Lerner (1999) that VCs use lock-in expiries to exit the firm. However, we do find that VCs that invested in firms listed on the Nouveau Marché keep a minority stake also after their last expiry.…”

“…Gompers and Lerner (1999) add that VCs have similar incentives. Although they often use IPOs as an exit route, they frequently retain part of their holdings at the IPO and therefore have to wait until the lock-in period has expired to sell the remainder of their shares.…”

“…Therefore, the dates at which the different pre-IPO shareholders are released from their lock-in agreements are known by the public prior to the IPO. Gompers and Lerner (1999) argue that in order to have a well-functioning stock market one needs a welldeveloped venture capital sector. Contrary to Europe, the US and the UK have a relatively long history of venture-capital financing.…”

Going Public – Going Private: The Case of VC-Backed Firms

“…VCs as intermediaries standing in-between their investors and the portfolio firms are in very many cases designed as closed-end funds implying that they have to disinvest their ventures after a quite limited number of years (typically, the closed-end funds last for 10-12 years, see e.g. Gompers and Lerner (2004))). Thereby, they have two major alternatives at hand to sell their shares in their successful portfolio firms: either to sell the entire firm to another firm in the course of a trade sale or to opt for an initial public offering and to divest in the course of the going-public process (see e.g.…”

The problem of private under-investment in innovation: A policy mind map

“…The recent emergence of venture capital is perhaps the most remarkable example of the astounding capacity of financial institutions to innovate (Gompers and Lerner, 1999). At the same time, it gives ample evidence of the prominent (but often overlooked) role of public policy in the enhancement of these new markets.…”