Abstract

Even though the VC literature acknowledges that VCs do not completely exit at the IPO and frequently stay invested long after an IPO, little attention has been paid towards how VCs exit post-IPO and how their exits affect the governance of their portfolio companies (PCs). We use a unique hand-collected VC ownership dataset derived from various SEC filings and examine VC exit patterns and how they relate to both the performance of their portfolio companies and to external governance mechanisms (e.g., litigation).

In the first essay, we examine how the ownership stakes of lead VCs evolve after their PCs are publicly listed. Lead VCs retain their holdings, on average, for three years post-IPO, and their primary exit mechanisms include share distributions (SDs), continuous sales in the open market (C Sales), and mergers and acquisitions (M&As). We find that the VC investment period before the IPO, the PC age before the IPO, and the percentage change in the post-IPO stock price all incentivize earlier VC exits and drive the choice of exit mechanism. Our results suggest that lead VCs remain invested longer when PCs are of better quality, when lead VCs have more experience in taking companies public, and when lead VCs hold positions in the companies’ compensation committees.

In the second essay, we study whether VCs act opportunistically by exiting their PCs via an unfavorable merger. Employing a sample of 697 M&A offers for VC-backed IPO companies from 1996 to 2018, we find that takeover bids that occur in the presence of lead VCs command a higher initial premium and are less likely to be legally contested compared to bids for companies from which the lead VC has already exited. In addition, these companies enjoy higher stock price returns in response to the M&A announcement and muted price declines around the litigation date. We also document the importance of several lead VC characteristics in determining their portfolio companies’ litigation risk.

In the third essay, we examine the influence of VCs’ need to exit on post-IPO M&A activity. Using a sample of US VC-backed IPO companies from 1996 to 2014, we show that the presence of a lead VC indeed increases the probability of a portfolio company receiving a post-IPO takeover bid. However, to facilitate the merger, they do not influence the PC’s management to avoid anti-takeover provisions. M&As that happen in the presence of lead VCs are completed faster and benefit the target shareholders by providing a higher takeover premium. Besides, acquirers of lead VC present companies do not suffer in terms of short or long-term market value.