When should venture capitalists exit their investee companies?

Xun Li, Hwee Huat Tan, Craig Wilson, Zhenyu Wu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

4 Citations (Scopus)

Abstract

Purpose: Exit strategies are critical for external private equity holders, such as venture capitalists and business angels, to receive investment returns successfully. The paper models the exit decision as a fixed date with the option to exit early, and develop an approach to help private equity holders determine an optimal early exit region based on a target equity value and the time remaining. Design/methodology/approach: The paper sets up a continuous time model to derive analytical solutions and apply simulations to numerical examples in this study. Findings: By numerically analyzing the nature of the solution the paper illustrates that a higher return drift of the investee company, a lower return volatility of the investee company, and a higher target return of the private equity holder results a smaller early exit region. Originality/value: This study helps determine the optimal time of stopping investments, and provides venture capitalists with a usable way to make exit decisions.
Original languageEnglish
Pages (from-to)351-364
Number of pages14
JournalInternational Journal of Managerial Finance
Volume9
Issue number4
DOIs
Publication statusPublished - 20 Sep 2013

Keywords

  • Exit strategy
  • Investee companies
  • Optimal control
  • Optimal stopping
  • Venture capital
  • Venture capitalist

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Finance

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