The Extent of Venture Capital Exits: Evidence from Canada and the United States

Abstract

This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an IPO involves a sale of all of the venture capitalist's holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist's holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a secondary sale or a buyback exit (in which the entrepreneur buys out the venture capitalist), a partial exit entails a sale of only part of the venture capitalist's holdings. A partial write-off involves a write down of the investment. We perform empirical tests on samples of full and partial exits derived from a survey of Canadian and U.S. venture capital firms. The evidence indicates that partial exits are more likely for IPOs and secondary sales in Canada. Partial exits in Canada are also more likely the greater the market to book value of the investment. Partial exits in the U.S., by contrast, are more likely for buyback exits and when there is greater capital available for investment in the venture capital industry. The U.S. evidence further indicates that partial acquisition exits are more likely for technology firms, the longer the investment duration, and the greater the market to book value of the entrepreneurial firm. We also present evidence that the longer the investment duration, the more likely that venture capital investments will be written down, rather than completely written off. The differences we find between the Canadian and U.S. samples highlight the impact of legal and institutional factors on exit strategies.