Get access

Innovation and Venture Capital Exits*


  • *

     The author has benefited from numerous discussions with Ulrich Hege and Charles Van Wymeersch. He also thanks Stefan Arping, Christopher Hennessy, Patrick Legros, Enrico Perotti, Isabelle Platten, Loic Sadoulet, Mark Seasholes and Ernst-Ludwig von Thadden for their encouragement and constructive comments on this article, and participants at the 2000 FMA European doctoral meetings, the CEPR conference on the ‘Evolution of Market Structure in Network Industries’, the Belgian Financial Research Forum 2001, the 2001 FMA European conference, the 2001 AFFI conference, the CEPR-WZB conference on ‘Innovation Policy and International Markets’, and seminars in Amsterdam, Berkeley, Groningen, Leuven, Montreal, Namur and Tilburg. The article was completed while the author was a visiting scholar at the University of California at Berkeley, Haas School of Business. Financial support by the Intercollegiate Center for Management Sciences (ICM) in Belgium and EU Grant Ricafe2 CIT5-CT-2006-028942 is gratefully acknowledged. The usual disclaimer applies.


This article analyses how start-ups financed by venture capital choose their innovation strategy based on the investor's exit preferences and thereby form different outcomes in the product market. It considers innovation choices and venture capital exits (IPO vs trade sale) in a setting in which entrepreneurs derive private benefits from staying independent, which is better guaranteed under an IPO. The entrepreneur has incentives to distort the innovation strategy in order to induce the venture capitalist to bring the company public. The analysis generates a number of empirical implications for the link between innovation, valuation, venture capital exit routes and market structure.