The Impact of Exit Expectation on VCs’ Entry Decision: A Real Option Model

Purpose/SignificanceA good exitable market is the key to the sustainable and healthy development of the venture capital industry.

Design/MethodologyConsidering two interactive exit ways for VCs, IPO and liquidation, the paper develops a two-stage real option model to study the exit and entry decisions and then focuses on how the entry decision for VCs is affected by exit expectation in future.

Findings/ConclusionThe results show that the acceleration of IPO pace makes VCs not only become more reluctant to exit via liquidation but also be more willing to invest in earlier stages of emerging firms, and the increase of exit return also encourages VCs to invest early whether they eventually exit via IPO or liquidation. For VCs with higher shareholdings, they are more likely to wait for IPO rather than exit via liquidation, which also eventually leads VCs to be more willing to invest in earlier stage of firms. In addition, fluctuations in the future cash flow of the enterprise have a delaying effect on the entry of venture capital, but the delaying effect will be weakened by the increase in the expected growth rate of cash flow.The research results provide a micro theoretical support for the interaction between the capital market and the venture capital industry at the macro level.