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Recently, Dr. Sai LAN, Associate Professor of Innovation and Entrepreneurship and DBA Supervisor at emlyon Business School, published a new research paper titled “Venture capital exit after venture IPO” in the renowned Strategic Entrepreneurship Journal. This study provides an in-depth analysis of venture capital (VC) firms' equity retention strategies following the initial public offering (IPO) of their portfolio companies, offering fresh perspectives and insights into the field of investment strategy. Recognized by the Social Science Research Network (SSRN) as one of the top ten most downloaded papers in VC investment, this research highlights its substantial academic value and notable impact on investment practices.
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Paper Overview: VC Equity Retention Strategies Through the Lens of Exchange Option Theory
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This study investigates why Venture Capital firms (VCs) often retain equity in entrepreneurial ventures even after those ventures have gone public through an Initial Public Offering (IPO). Traditionally, VCs exit their investments at IPO to realize returns, but this research highlights a strategic decision to hold onto equity to potentially capitalize on the venture's future growth and valuation increases.
The core concept discussed in the paper is the "exchange option" theory. This theory conceptualizes the decision to retain equity as holding an option to trade the VCs' valuation of the venture for the market’s valuation at a later date. Retaining equity allows VCs to benefit from the upside potential if the market’s valuation exceeds their own. This is a strategic move especially when there are high levels of uncertainty and VCs possess private information suggesting the venture's value will increase.
The research suggests that two main factors influence the value of the exchange option and hence the decision to retain equity: Uncertainty and Private Information. Increased uncertainty in a venture’s industry heightens the value of the option to retain equity. Uncertainty here is broadly defined and can stem from various sources like market volatility, technological advancements, or regulatory changes. Meanwhile, VCs often have access to confidential information that is not available to the market. This could include detailed insights into the venture's operations, future products, or market strategies. Positive private information that is not yet reflected in the public valuation can encourage VCs to hold onto their shares.
The paper supports its findings with empirical data, indicating that VCs are more likely to retain equity when there is a combination of high industry uncertainty and positive private information. This suggests a strategic approach to maximizing investment returns by leveraging knowledge that is not available to the market.
Additionally, the study contributes to the broader understanding of post-IPO behaviors of VCs, providing insights into the strategic considerations that guide their exit decisions. It highlights how VCs are not just passive investors but are actively managing their investment positions to optimize returns.
In summary, this paper offers a new perspective on why VCs might choose to retain equity in IPO ventures, emphasizing the strategic role of exchange options under uncertainty and asymmetric information. It’s a significant addition to the literature on venture capital investment strategies, suggesting that VCs' decisions are influenced by their expectations of future market developments and their informational advantages. This work has implications not just for academics but also for practitioners in the venture capital and entrepreneurial finance fields.
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About Professor Sai LAN
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About the Strategic Entrepreneurship Journal
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The Strategic Entrepreneurship Journal (SEJ), established in 2007 and published by Wiley on behalf of the Strategic Management Society, is recognized as a premier journal in the field of innovation and entrepreneurship research. Widely indexed in top academic directories for innovation and entrepreneurship management, including FT50 and AJG (ABS) 4, SEJ focuses on publishing high-quality research on global innovation and entrepreneurship, committed to rigorous scientific methods, theoretical foundations, and empirical data.
法国里昂商学院作为培养未来商业领袖的摇篮，我们诚挚邀请各界管理精英把握时机，携手步入商业智慧的新纪元。
北京邮电大学-法国里昂商学院EMBA (中外合作办学) 项目
开学时间：4月春季班 (55人)，10月秋季班 (45人)
全球工商管理博士 (DBA)
开学时间：11月28日
企业家商学院讲师证书课程 (CBL)
招生截止日期：12月20日
交大-里昂 新媒体管理与数字经济DMDE联合项目
招生截止日期：12月14日
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