Entrepreneurial Firm Characteristics

Exit Outcomes
Cumming and Johan (2009 Chapters 20 and 21)
Plus some supplementary material
© Cumming & Johan (2009) Exits

Exits – Definitions and Overview
Canadian Exits
European Exits
Australasian Exits
US versus Canada Full Partial Exits
Venture Capital Exits
IPOs
Acquisitions
Secondary Sales
Buybacks
Write-offs

Canadian Exits
European Exits
Australasian Exits
What is a “Venture Capital Exit” ?
• The means by which venture capitalists (VCs) dispose of

their investments (recall introductory statistics lecture)
• Exit Types
» IPO
» Merger/Acquisition
» Secondary Sale
» Buyback
» Writeoff

Canadian Exits
European Exits
Australasian Exits
What Drives Choice of VC Exit?
1. Entrepreneurial firm characteristics
2. VC characteristics
3. Cash flow and control rights between VC and

entrepreneur
4. Market conditions
5. Legality and institutional factors across countries

Exits – Definitions and Overview Entrepreneurial firm characteristics
Canadian Exits VC characteristics
Cash flow and control rights between VC and entrepreneur
European Exits Market conditions
Australasian Exits Legality and institutional factors across countries
1. Entrepreneurial Firm Characteristics
• Size
– Minimum listing standards for IPO
• Quality
– Not possible to take bad companies public?!
– Important to minimize information problems to max sale price (next slide)
• Industry
– High Market/Book  high growth potential
• Location
• Transaction synergies with new owner(s)

– Very important for acquisitions, & possibly IPOs

1. Firm Characteristics: Exit Vehicles and Info Asymmetry
Exit Vehicle New Owners Info

Asymmetry
IPO Public 1 (Most
Shareholders Pronounced)
Acquisition 3rd Party 3
Secondary 3rd Party & 2

Sale Entrepreneur
Buyback Entrepreneur 4
Writeoff --- N/A

2. VC Characteristics
• LPs versus corporate

• & versus Government funds!
• Kliener Perkins versus “Fargo” VC Fund
• Fund Capital
• Connections with Investment Banks and/or Microsoft

type companies

3. Control Rights
• Entrepreneurs have a non-pecuniary

preference for IPOs
• Weak VC control rights and common equity 

IPOs more likely?
• Strong VC control rights and convertible

securities  acquisitions more likely?

4. Market conditions
• Significant factor in IPOs

– 1999 – April 14, 2000
• Also a significant factor in write-offs!

– Post April 14, 2000

5. Legality / Institutional Factors
• Legal
– Quality of shareholder rights
– Corruption
– Contract repudiation
– Rule of Law
– Efficiency of Judiciary
• Institutional
– Size of country’s stock market

Canadian Exits
European Exits
Australasian Exits
Canadian Exits Performance
Cumming and Johan (2009 Chapter 20)

Table 20.1. Summary Testable Hypotheses
This table summarizes the central hypotheses and describes the variables used to test the hypotheses.
Hypo-
Variable Description Hypothesized Effect on Exit Outcomes
thesis #
Venture Capital
Characteristics
The fraction of the number of limited partnership venture
Limited Partnership IPOs and acquisitions are more likely than secondary sales, buybacks and
20.1 capital funds that were syndicated venture capital funds at
Venture Capitalist write-offs for limited partnership venture capital funds.
the first round investment.
The fraction of the number of corporate venture capital
Corporate Venture Acquisitions are more likely than IPOs as the corporate venture capital has
20.2 funds that were syndicated venture capital funds at the first
capital fund strategic incentives to invest.
round investment.
The fraction of the number of government venture capital
Government Venture Weaker governance structure associated with government funds, and
20.3 funds that were syndicated venture capital funds at the first
capital fund therefore a greater probability of secondary sales, buybacks and write-offs.
round investment.
A greater number of syndicate venture capital funds will reduce adverse
Number of Syndicated The number of syndicated venture capital funds in the first
20.4 selection problems and facilitate value added, thereby increasing the
Venture capital funds round investment.
probability of an IPO
Entrepreneurial Firm
Characteristics
A dummy variable equal to one for firms in one of the life Increases the probability of an IPO, as IPO investors often have an appetite
Life Science Industry 20.5
sciences industries (biotechnology or medical) for technology companies
Other High-Tech A dummy variable equal to one for firms in one of the high- Increases the probability of an IPO, as IPO investors often have an appetite
20.5
Industry tech industries other than the life sciences industries. for technology companies
A dummy variable equal to one for seed or early stage Higher probability of a write-off as risks are greater the earlier the stage of
Seed or Early Stage 20.6
investments in the first round of investment investment
A dummy variable equal to one for expansion stage Lower risks relative to seed and early stage investments, and therefore a
Expansion Stage 20.6
investments in the first round of investment lower probability of a write-off
Entrepreneur Capital The log of the amount invested in the first round investment
Larger investments are more likely to go public as there are minimum capital
Requirements 20.7 across all syndicated venture capital funds, in thousands of
requirements for listing.
[Log (Deal Size)] 2004 Canadian dollars.
Venture capital fund and A dummy variable equal to one if the venture capital fund
Higher probability of an IPO and acquisition as adverse selection problems
Entrepreneur in Same 20.8 and the entrepreneur were located with the same province at
are mitigated and value-added facilitated by regional proximity.
Province the time of first round investment

Table 20.1. Summary Testable Hypotheses
(Continued)
Hypo-
Variable Description Hypothesized Effect on Exit Outcomes
thesis #
Transaction
Characteristics
Increases the probability of an IPO over an acquisition, as common equity

The fraction of the number of first-round investment
signals favorable information to the public market. As well, higher quality
securities in the form of common equity and/or warrants. If
Common Equity and/or entrepreneurs are more likely to negotiate common equity contracts. Further,
20.9 only common equity was used then the variable equals 1,
Warrants entrepreneurs typically have stronger control rights when the venture capital
and if common equity was not used then the variable equals
fund uses common equity, and therefore entrepreneurs with a non-pecuniary
0.
preference for an IPO are less likely to be acquired than go public.
The fraction of the number of first-round investment

securities in the form of convertible preferred equity and/or Provides incentives for the venture capital fund to add value and thereby
Convertible Securities 20.10 convertible debt. If only convertible securities were used increase the probability of both IPOs and acquisitions over secondary sales,
then the variable equals 1, and if convertible securities were buybacks and write-offs.
not used then the variable equals 0.
Control Variables:
Institutional and
Economic Conditions
Higher probability of an IPO and acquisition as economic activity is greater

Entrepreneur A dummy variable equal to one for an entrepreneur based in
in the of and than other provinces.
Higher probability of an IPO and acquisition as economic activity is greater
Entrepreneur A dummy variable equal to one for an entrepreneur based in
in the of and than other provinces.
Higher probability of an IPO or acquisition in boom market conditions;
Log (1+MSCI Index in The log of 1+ the Morgan Stanley Capital International stock index
greater probability of secondary sales, buybacks and write-offs in bad market
Year of Exit) return for in the year of exit
conditions
Log (1+MSCI Index in The log of 1+ the Morgan Stanley Capital International stock index
greater probability of secondary sales, buybacks and write-offs in bad market
Year Prior to Exit) return for in the year prior to exit
conditions
Dummy for Exit in 1999 A dummy variable equal to one for exits in 1999 greater probability of secondary sales, buybacks and write-offs in bad market
conditions
Dummy for Exit in 2000 A dummy variable equal to one for exits in 2000 greater probability of secondary sales, buybacks and write-offs in bad market
conditions
Figure 20.1. Number of Venture Capital - Backed Exits by Year, 1991-1994
60
50
40
Number of Exits
30
20
10
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
IPO Acquisition Secondary Sale Buyback Write-off

Figure 20.2. Percentage of Exit Outcomes for Each Type of Investor
60.00%
50.00%
40.00%
30.00%
20.00%
10.00% Writeof f
Buyback
0.00% SecSale
Acquisition
Corporate
IPO
Government
Hybrid
Labour Sponsored
Private Independent
Unknown

Figure 20.3. Percentage of Exit Outcomes for Each Stage of First Investment
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
Acquisition
5.00% Buyback
Secondary Sale
0.00%
IPO
Seed
Early
Expansion Write-off
Buyout
Turnaround
Unknown

Figure 20.4. Percentage of Exit Outcomes for Each Type of Security
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00% Acquisition
Write-of f
0.00% Buyback
Secondary Sale
IPO
Preferred
Common and/or Warrants
Convertible Preferred
Convertible Debt
Debt
Unknown
Mixed Common with Preferred and/or Debt

Table 20.4 IPO Acquisition Secondary Sale Buyback Write-off
Marginal Marginal Marginal

Panel A (Condensed) t-statistic Marginal Effect t-statistic t-statistic Marginal Effect t-statistic t-statistic
Effect Effect Effect
Constant -0.127 -2.476** -0.146 -0.622 0.062 0.512 -0.131 -0.704 0.342 1.777*
Venture capital fund

Fund Characteristics
Limited Partnership
0.024 2.081** 0.161 2.394** -0.071 -1.524 -0.013 -0.216 -0.101 -1.630
Number of Syndicated
1.202E-05 0.004 0.016 0.639 0.003 0.221 -0.057 -2.413** 0.038 1.800*
Venture capital funds

Characteristics
Life Science Industry 0.036 2.349*** 0.399 4.231*** -0.104 -2.039** -0.259 -3.404*** -0.072 -0.929
Other High-Tech
0.005 0.504 0.356 4.938*** -0.071 -2.032** -0.243 -4.635*** -0.046 -0.822
Industry
Seed or Early Stage -0.032 -2.172** 0.068 0.659 -0.122 -3.021*** 0.009 0.139 0.076 0.880
Expansion Stage -0.016 -1.465 -0.005 -0.049 -0.107 -2.547** 0.027 0.388 0.101 1.127
Log (Deal Size) 0.009 2.030** 0.031 1.219 -0.007 -0.603 0.023 1.261 -0.055 -2.757***

and Entrepreneur in 0.036 1.785* -0.112 -1.148 0.069 0.899 0.104 1.028 -0.097 -1.127
Same Province
Transaction

Characteristics
Common Equity and/or

0.022 1.966** -0.004 -0.062 0.061 1.870* -0.074 -1.464 -0.005 -0.092
Warrants
Convertible Securities -0.008 -0.601 -0.007 -0.080 -0.019 -0.370 -0.017 -0.259 0.050 0.749
Economic Conditions
Ontario Entrepreneur -0.015 -1.354 0.012 0.155 -0.112 -2.103** 0.084 1.079 0.030 0.410
Quebec Entrepreneur -0.014 -1.472 -0.309 -3.935*** 0.049 1.170 0.219 3.081*** 0.055 0.801
Log (1+MSCI Index in

-0.049 -1.847* -0.118 -0.924 0.034 0.506 0.098 0.953 0.034 0.325
Year of Exit)

0.007 0.296 0.137 1.135 -0.062 -1.019 0.196 2.197** -0.278 -2.665***
Year Prior to Exit)
Dummy for Exit in 1999 0.049 2.211** 0.358 2.337** 0.024 0.391 -0.452 -2.551** 0.021 0.175
Dummy for Exit in 2000 0.028 1.954* 0.028 0.326 -0.081 -1.498 -0.265 -3.638*** 0.290 4.291***

Table 20.4 IPO Acquisition Secondary Sale Buyback Write-off
Marginal Marginal Marginal

Panel B (Condensed) t-statistic Marginal Effect t-statistic Marginal Effect t-statistic t-statistic t-statistic
Effect Effect Effect
Constant -0.107 -2.296** 0.055 0.232 -0.028 -0.348 -0.241 -1.229 0.321 1.570

Fund Characteristics
Corporate Venture
0.015 1.202 0.282 2.362** -0.351 -3.102*** -0.136 -1.236 0.191 1.902*
capital fund
Government Venture
-0.021 -1.841* -0.229 -3.137** 0.071 2.047** 0.146 2.309** 0.034 0.503
capital fund or LSVCC
Number of Syndicated
0.000 0.082 0.006 0.212 0.014 1.562 -0.053 -2.142** 0.034 1.503
Venture capital funds
Characteristics
Life Science Industry 0.039 2.312** 0.410 4.185*** -0.071 -1.882* -0.268 -3.405*** -0.110 -1.305
Other High-Tech
0.007 0.702 0.332 4.389*** -0.040 -1.630 -0.229 -4.165*** -0.070 -1.126
Industry
Log (Deal Size) 0.008 1.951* 0.026 1.013 -0.004 -0.515 0.026 1.361 -0.056 -2.660***
Transaction
Characteristics
Common Equity and/or

0.025 2.039** 0.014 0.206 0.035 1.522 -0.071 -1.331 -0.003 -0.051
Warrants
Convertible Securities -0.007 -0.478 -0.027 -0.321 -0.008 -0.262 0.010 0.148 0.032 0.448
Economic Conditions

-0.050 -1.801* -0.103 -0.781 0.018 0.414 0.099 0.919 0.036 0.320
Year of Exit)

0.000 0.014 0.130 1.045 -0.033 -0.846 0.211 2.251** -0.309 -2.759***
Year Prior to Exit)
Dummy for Exit in 1999 0.053 2.257** 0.388 2.455** 0.004 0.093 -0.462 -2.562** 0.017 0.138
Dummy for Exit in 2000 0.031 2.004** 0.042 0.462 -0.070 -1.768* -0.318 -4.120*** 0.315 4.361***

Canadian Exits
European Exits
Australasian Exits
Summary
• Fund Type
– Limited partners: IPO or acquisition
– Corporate: acquisition
– LSVCC: buyback or secondary sale
• Transaction type
– Common equity: IPO
– Consistent with European evidence discussed in Chapter 21
• Entrepreneur characteristics and economic conditions
also important

Canadian Exits
European Exits
Australasian Exits
Control Rights and VC Exits
Cumming and Johan (2009 Chapter 21)

Canadian Exits
European Exits
Australasian Exits
Data
• 223 entrepreneurial firms

• Hand-collected from 35 private equity funds
• 11 continental European countries: Germany (50), The
Czech Republic (5), The Netherlands (73), Switzerland
(15), Italy (23), Denmark (11), France (6), Belgium (12),
Poland (12), Austria (10) and Portugal (6).
• Investment Years 1995 – 2002.
• Exit Years 1996 – 2005.

Securities Used by Year of Investment in European Data (Chapter 21)
40
35
30
Total Number per Year
25
20
15
10
0
1995 1996 1997 1998 1999 2000 2001 2002
Year
Straight Debt or Straight Preferred Preferred or Debt and Common Common Equity Convertible Debt or Convertible Preferred Equity

Table 21.5. Multinomial Logit Regressions (selected variables excluded to fit on this slide)
IPO Acquisition Buyback Write-off IPO Acquisition Buyback Write-off

Constant -0.613 3.173* -0.013 -1.260 -1.056 3.259* 0.226 -0.984

Investor Characteristics
Log (Fund Capital) -0.011 -0.036 -0.047** -0.001 0.030 -0.108 -0.050* 0.037
Non-Captive VC Fund -0.004 -0.221* 0.103** 0.048 0.058 -0.214* 0.084* 0.012

Transaction Characteristics
Log (Private Investment Value) 0.019 -0.043 0.005 0.039 0.014 -0.031 0.004 0.023
Prior Rounds 0.029 0.282** -0.019 -0.301** 0.030 0.395** -0.019 -0.413**
Replace CEO -0.068 0.386*** 0.024 -0.159 -0.068 0.236* 0.036 -0.028
Majority Board -0.106** 0.237*** -0.039 0.035 -0.092* 0.184* -0.043 0.082
Majority Vote 0.040 -0.059 0.006 -0.085
Control Rights Index -0.066** 0.122** 0.014 -0.072
Veto Rights 0.011 0.056 -0.008 -0.052

Market Characteristics
Log (MSCI 0-3 Months) 1.007*** -1.668*** 0.290 0.366 0.916*** -1.682** 0.254 0.603
Investment Year Dummies? Yes Yes Yes Yes Yes Yes Yes Yes

Institutional and Legal Variables
Log (Legality) -0.026 -0.833 0.110 0.203 0.046 -0.787 0.060 0.116
Log (Market Capitalization) 0.052* 0.063 0.014 0.003 0.022 0.093 0.013 0.005
Country Dummies? Yes Yes Yes Yes Yes Yes Yes Yes

Canadian Exits
European Exits
Australasian Exits
Some Key Findings
• Strong VC control rights  Acquisition
• Weak VC control rights / common equity 

IPO
• Why?

Canadian Exits
European Exits
Australasian Exits
Puzzle
• Legality less important than size of stock

market in driving exit outcomes in Europe
• Legality more important than size of stock

market in driving exit outcomes in Asia-
Pacific region
• Why?

Canadian Exits
European Exits
Australasian Exits
Some Further Evidence… Asia Pacific
Cumming, Fleming & Schwienbacher (2006,

Journal of Corporate Finance)

Canadian Exits
European Exits
Australasian Exits
Venture Capital (“VC”) Exits

Exit Vehicle New Owners Partial Exit
IPO Public Shareholders > 1 Year from 1st
disposition
Acquisition 3rd Party Company (Illiquid) shares
Private Secondary Sale 3rd Party Company > 1 Year from 1st
Exits & Entrepreneur disposition
Buyback Entrepreneur > 1 Year from 1st

disposition
Write-off NA Write-down of
book value

Canadian Exits
European Exits
Australasian Exits
Core Research Question
• Does legality affect VC exit outcomes?

 IPO
 private sale (acquisition, secondary sale, buyback)
 write-off
• Related questions in companion work:

1. Does legality affect investment decisions
2. Does legality affect decision to move company from Asia-
Pacific to the United States

Canadian Exits
European Exits
Australasian Exits
Competing Theories
• Black and Gilson (1998 JFE Discussion Paper)

 Venture Capital Markets Require Strong Stock Markets to
Facilitate IPOs
 Proposition not previously subject to empirical scrutiny
• Shleifer and Wolfenzon (2002 JFE)

 IPOs facilitated by Legality
 Proposition not previously subject to empirical scrutiny

Canadian Exits
European Exits
Australasian Exits
Cumming Fleming Schwienbacher 2006 Journal of

Corporate Finance
 1st Multi-country dataset on VC exits
 12 Asia-Pacific countries – new look at VC in the region
 Relation between legality (La Porta et al variables) and venture

capital exits
 “Horse Race” on role of Legality versus Size of Stock Market
 Cross-country comparisons on other dimensions

Canadian Exits
European Exits
Australasian Exits
Central Findings in this Paper
1. Legality facilitates VC-backed firms achieving IPO (supports

Shleifer and Wolfenzon 2002 JFE)
2. Size of a country’s stock market unrelated to probability of an

IPO (reject Black & Gilson 1998 JFE)
3. VC-backed firms also more likely to go IPO when:

a. Higher market/book frims
b. Larger firms
c. Limited partnership VCs (not captive VCs)
d. VCs with more capital (reputation)

Exits – Definitions and Overview Hypotheses
Canadian Exits Data
European Exits Empirical Tests
Australasian Exits Conclusion
Primary Competing Hypotheses
• Legality  VC IPO exits

 Legality mitigates agency problems between outside
shareholders and entrepreneurs
 Shleifer and Wolfenzon (2002 JFE)
 No empirical tests considered
• Stock Market Capitalization  VC IPO exits

 Black and Gilson (1998 JFE)
 No empirical tests considered

Canadian Exits Data
Control Variables
• Market & Institutional Conditions

 MSCI Returns
 Country dummy variables (esp. for moves to US)
• VC Fund Characteristics
 Age, size
 US-affiliation
 Captive versus Limited Partnership
• Entrepreneurial Firm & Investment Characteristics

 Industry market / book
 Size
 Syndication, Co-investment

Canadian Exits Data
Data
• 468 VC-backed companies, 1989 – 2001
 Australia, China, Hong Kong, India, Indonesia, Malaysia, New
Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand
 These countries’ VC investments in US-based entrepreneurial
firms
 Source: Wilshire and Associates, Ltd.
• Similar in scope to related VC papers with hand-collected

datasets (typically 100 – 200 observations)
 E.g., Lerner and Schoar (2003)

Figure 1 . Investment and Exit Years in the Dataset
30.00%
25.00%
Percentage 20.00%
of All
Investments
(of All Exits 15.00%
for Subsample
of Exited
Investments) 10.00%
5.00%
Exit Years
0.00%
1989 1990
1991 1992 Investment Years
1993 1994
1995 1996
1997 1998
1999 2000 2001

Figure 2. Frequency of and Returns to Alternative Exit Outcomes
120
100
80
Number
60
of Exits
40
IPO
20 Private Exit
Write-off
0
Partial Realization
-100
-75
-50
-25
0
25
50
75
100
125
150
175
No Exit
200
225
250
275
300
325
350
375
400
425
IRR (%)
450
475
500
1000

Table 2. Countries Represented in the Exits Database, and the Legality Components
Total Market # #
Average Median # Unexited
Country Legality Capitalization # IPOs Private Write-
IRR IRR Investments
(Billions US$) Exits offs
New Zealand 21.55 19.69 0.905 0.365 4 10 0 1
Asia-Pacific
20.85 12380.03 0.480 0.064 9 49 21 38
VC Inv. in US
Australia 20.44 242.26 0.164 0.189 27 43 23 22
Singapore 19.53 130.42 0.341 0.145 1 7 3 2
Hong Kong 19.11 278.95 -0.056 0.070 2 11 3 8
Malaysia 16.67 108.65 -0.168 -0.168 0 1 0 0
India 12.80 213.19 1.020 1.020 2 1 0 0
Thailand 12.94 70.02 -0.101 -0.101 0 9 3 0
China 19.23 461.42 -0.063 0.084 2 12 2 2
Taiwan 17.62 388.13 0.723 0.445 31 39 0 62
South Korea 14.23 260.00 0.145 0.250 0 3 0 0
Indonesia 9.16 25.68 -0.029 -0.015 0 14 0 0
Philippines 8.51 13.04 -0.003 -0.003 0 1 0 0

Table 3. Difference Tests and Summary Statistics
Proportion
Difference Test
Characteristic Tested # Firms of IPO
Statistic
Exits
Full Sample 468 0.167
Average Legality Index > 20 (Excluding US and Taiwan) 132 0.235

2.303**
Average Legality Index < 20 (Excluding US and Taiwan) 87 0.080
Average Market Cap. > 300 (Excluding US and Taiwan) 22 0.182

0.082
Average Market Cap. < 300 (Excluding US and Taiwan) 197 0.173
US Only 117 0.077

-2.574**
Taiwan 132 0.235
US Only 117 0.077
-2.488**
Australia 115 0.235
Taiwan 132 0.235
0.001
Australia 115 0.235
Taiwan 132 0.235
1.990**
All Other Countries Excluding US, Australia 104 0.106
Canadian Exits Data
Regressions (Tables 5 – 7)
Focus of Empirical Tests

 Probability of exit outcomes
 Multinomial regressions of the likelihood of an IPO versus private sale
transaction and versus write-off
 Other tests considered (not discussed today)
Robustness Tests
 Endogeneity, collinearity, heteroscedasticity
 Definitions of variables
 Single / multi-step estimation
 Binomial / multinomial logit estimates
 Heckman (1976, 1979) selection effects
 Other

Multinomial Logit Probability Probability Probability
Regressions IPO Private Exit Write-off
Log (Legality) 0.854** -1.389*** -0.150
Log (Market Cap) -0.0001 -0.058 -0.011
Market Conditions:
MSCI Variables 0.216 -0.895*** 0.352**
VC Fund Characteristics:
Captive VC -0.030 -0.018 0.089**
Log (VC Fund Capital) 0.181*** -0.217*** -0.051**
Ent. Firm / Trans Char.:

Industry Market / Book 0.080** -0.070 0.008
Log (Book Value) -0.008 0.015* -0.002
Syndication 0.073 0.015 -0.084*
Co-Investment 0.001 0.0001 0.002***

Heckman Like 2-Step Probability of Exit
Sample Selection Models (versus no exit) Probability of IPO Exit
Log (Legality) 0.704***
Log (Market Cap) 0.057
Market Conditions
MSCI Variables 0.168
VC Fund Characteristics
Captive VC -0.114*
Log (Fund Capital) 0.128***
Ent Firm / Transaction

Char 0.079**
Industry Market / Book -0.010
Book Value
Later Years Negative ***
Investment Year Dummies
Canadian Exits Data
Primary Results Re Legality
• An increase in the Legality index from 20-21

(e.g., Hong Kong  Australia)
increases the probability of an IPO by 1.7%
• An increase in Legality from 10-11

(e.g., Philippines  Indonesia)
increases the probability of an IPO by 3.3%

Canadian Exits Data
Central Findings in this Paper
1. Legality facilitates VC-backed firms achieving IPO (supports

Shleifer and Wolfenzon 2002 JFE)
2. Size of a country’s stock market unrelated to probability of an

IPO (reject Black & Gilson 1998 JFE)
3. VC-backed firms also more likely to go IPO when:

a. Higher market/book frims
b. Larger firms
c. Limited partnership VCs (not captive VCs)
d. VCs with more capital (reputation)

Canadian Exits Data
Outliers and Further Research
• High legality not necessary in special cases: Taiwan:

successful VCs despite low legality index
 Entrepreneurial culture in Taiwan
• Legality not sufficient in special cases:

Asia-Pacific VC investments in US entrepreneurial firms:
less likely to go IPO
 Weak VC certification in IPOs across the Pacific

Canadian Exits
European Exits
Australasian Exits
Now…Full versus Partial Exits
Source: Cumming and MacIntosh (2003 Journal of Banking and Finance)
2004 Ido Sarnat Best Paper Award in the Journal of Banking and Finance

Exits – Definitions and Overview Definitions
Canadian Exits Hypotheses
European Exits Data
Australasian Exits Empirical Tests
US versus Canada Full Partial Exits Conclusion
Full and Partial VC Exits
• IPO, Secondary Sale and Buyback Exits:

Full: dispose of investment within 1 year of 1st distribution;
Partial: more than 1 year
• Acquisition Exits:
Full: cash payment
Partial: (illiquid) shares
• Write-off Exits:
Full: liquidation
Partial: write-down

European Exits Data
Research Questions
Does the extent of VC exit depend on:
1. Characteristics of Entrepreneurial Firm?
2. Duration of Venture Capital Investment?
3. Exit vehicle selected?
4. Regulatory Environment?

European Exits Data
Contributions
1. Relate VC investment duration, exit vehicles, and entrepreneurial

firm characteristics to exit strategies
2. Introduce the first empirical evidence on the extent of exit for the
complete set of VC exits
3. Document the first cross-country evidence [Canada and the US] to

illustrate the effect of legal and institutional constraints on
efficient exit strategies
4. Consider implications for the risk & return to venture capital

European Exits Data
VC Exit Strategies
• Minimizing agency costs (moral hazard and adverse selection)

between entrepreneurial firm and its new owners maximizes the
value of the firm upon VC exit
• Partial exits reduce informational asymmetry between

entrepreneurial firm and new owner(s)
• Informational asymmetry and agency costs vary by:

1. Length of VC investment,
2. Entrepreneurial firm characteristics (e.g., the nature of its
assets, market & book values)
3. Exit vehicle

Exit Vehicles and Info Asymmetry
Info asymmetry  Partial Exits
Exit Vehicle New Owners Info Asymmetry
IPO Public 1 (Most

Shareholders Pronounced)
Acquisition 3rd Party 3
Secondary Sale 3rd Party & 2

Entrepreneur
Buyback Entrepreneur 4
Write-off --- N/A

Entrepreneurial Firm Institutional and
Characteristics Regulatory Environment
-Market & Book Value -Securities Regulation
-Technology Firm -Government Sponsorship
-Stage of Development of Venture Capital
-Other -Other
Venture Capital Investment Duration
Venture Capital Exit Vehicle
Extent of Venture Capital Exit

European Exits Data
Investment Duration and Exit Strategy
• Longer VC investment duration mitigates informational

asymmetries between the entrepreneurial firm and its
new owners
• E.g., evidence that longer VC investment duration

mitigates IPO underpricing [Megginson & Weiss (1991)
JF]
• Longer investment duration  less need for partial exit

European Exits Data
Firm Characteristics & Exit Strategy
• Asset intangibility  greater informational asymmetry

 partial exit
• Buyout transactions: VC facilitates transfer of ownership

interest through a partial exit
• Other firm characteristics …

European Exits Data
Legal & Institutional Barriers to Efficient Exit Strategies
US: Private Venture Capital Funds
Canada: Government Sponsorship of VC (25% in

1992 to 50% in 1995)
 LSVCFs less able to credibly certify the quality of their
investments to the new owner(s)
 E.g., Must invest new funds within a few months!
 Greater need to commit to a partial exit strategy to certify

firm quality in Canada

European Exits Data
Securities Regulation & Institutional Differences
 More onerous in Canada (MacIntosh, 1994)  less liquidity of SME

securities in Canada
 Legal uncertainty with hold-periods and escrow requirements in

Canada  “cumbersome and confusing for issuers and investors”
(Tucker, 1999, CVCA Newsletter “Enterprise”)
 Fewer institutional IPO purchasers in Canada, and Canadian

underwriters are less specialized relative to their US counterparts
* Greater need for VCs to commit to partial IPO exits to certify firm
quality in Canada

European Exits Data
Data
• 112 U.S. Exits (Table 1a)

• Source: Venture Economics
• 1992-1995 (Approx 10% of Industry Exits)
• 134 Canadian Exits (Table 1b)

• Source: Macdonald & Associates
• 1992-1995 (Approx 32% of Industry Exits)

European Exits Data
Data Limitations
• Non-IPO exits (acquisitions, secondary sales, buybacks

and writeoffs) are private exits
• Some private data not obtainable, such as exact timing

of partial distributions
• But for all exit vehicles, we do know if VC exit was

complete within 1 year of the first distribution

Table II. United States Venture Capital Full and Partial Exits Data Summarized by Exit Vehicle*
Number of Average Technology Extent Full Sample Including Partial Exits Partial Exits Only Full Exits Only
Portfolio Duration Industry of Exit Average Average Average Gross Average Annual Variance in Average Annual Variance in Average Annual Variance in
Exit Vehicle Companies (Years) No Yes Partial Full Investment** Exit Value** Real Return(%) Real Return(%) Real Return(%) Real Return(%) Real Return(%) Real Return(%) Real Return(%)
IPO 30 4.7000 12 18 8 22 2,035,036 12,565,880 464.6397 54.9152 51.1517 83.5759 154.3296 44.4932 14.9276
Acquisition 30 5.1667 9 21 6 24 1,720,349 3,859,077 143.0386 57.8286 754.7467 20.1013 18.0705 67.2604 943.0674
Secondary Sale 9 6.3333 2 7 3 6 519,931 1,005,871 54.8768 -7.5650 6.6850 -3.1798 15.3582 -9.7570 4.3797
Buyback 6 4.0000 5 1 5 1 784,397 2,687,449 145.0423 24.7910 3.2665 21.6493 3.3428 40.4996 0.0000
Write-off 33 4.3636 15 18 2 31 1,984,068 92,500 -97.8450 -90.0070 4.8772 -100.0000*** 0.0000 -89.3620*** 5.1315
Other 4 2.7500 2 2 1 3 1,112,445 1,539,990 35.2761 34.0191 83.9444 165.6761 0.0000 -9.8670 10.3594
Total 112 4.7500 45 67 25 87 1,714,030 4,706,597 147.3815 5.6146 256.6047 34.1439 83.5232 -2.5835 304.8443
* Source: Venture Economics

** Real U.S. Dollars (base year=1990). CPI data source: International Financial Statistics, Label 11/64; available at www.chass.utoronto.ca.
Partial exit market values are adjusted to reflect full values. Real returns are calculated assuming investment at the beginning of the year, and exit at the end of the year, reflecting the lowest possible estimate.
*** Partial write-offs (write-downs) were recorded without indicating the full cost of the amount not written off. Full write-offs yielded a small return upon liquidation.
Table III. Canadian Venture Capital Full and Partial Exits Data Summarized by Exit Vehicle*
Number of Average Technology Extent Full Sample Including Partial Exits Partial Exits Only Full Exits Only
Portfolio Duration Industry of Exit Average Average Average Gross Average Annual Variance in Average Annual Variance in Average Annual Variance in
Exit Method Companies (Years) No Yes Partial Full Investment** Exit Value** Real Return(%) Real Return(%) Real Return(%) Real Return(%) Real Return(%) Real Return(%) Real Return(%)
IPO 36 5.8611 3 33 20 16 1,464,087 5,170,185 1385.8530 27.8282 9.8247 32.8825 10.6479 21.5102 8.6706
Acquisition 16 6.9375 9 7 1 15 1,945,386 3,271,514 84.5848 13.3089 2.9498 5.9532 0.0000 13.7993 3.1193
Secondary Sale 12 3.0833 0 12 5 7 402,144 968,181 165.6950 54.8972 90.2764 106.4305 179.2162 18.0877 8.0910
Buyback 41 6.3415 30 11 7 34 668,245 808,686 66.9712 3.8207 1.5041 9.9051 1.1401 2.5680 1.5212
Write-off 27 4.0741 18 9 1 26 332,038 3,821 -97.1010 -92.0440 4.3792 -100*** 0.0000 -91.7380*** 4.5280
Other 2 6.0000 2 0 1 1 2,412,731 3,687,627 60.1537 9.5346 0.1692 6.6257 0.0000 12.4435 0.0000
Total 134 5.5299 62 72 35 99 969,012 2,169,579 399.0807 -3.2530 33.8738 33.4777 41.8835 -16.2390 24.9186
* Source: Canadian Venture Capital Association.

** Real Canadian Dollars (base year=1990) converted to U.S. Dollars. CPI data source: CANSIM, Label P700000; available at www.chass.utoronto.ca. Foreign exchange rates from
CANSIM, label B3400. Values expressed in U.S. dollars for comparative purposes only. Returns were computed in Canadian dollars and do not reflect exchange rate changes.
Partial exit market values are adjusted to reflect full values. Real returns are calculated assuming investment at the beginning of the year, and exit at the end of the year, reflecting the lowest possible estimate.
*** Partial write-offs (write-downs) were recorded without indicating the full cost of the amount not written off. Full write-offs yielded a small return upon liquidation.

European Exits Data
Differences in exit performance between Canada and U.S.
• Lower risk and return in Canada relative to the US

– Securities regulation
– Government sponsorship of venture capital
• Partial exits typically associated with a higher risk and

return
– Selection effects: riskier ventures exited by a partial exit to
mitigate informational problems between the entrepreneurial
firm and new owners

European Exits Data
Tables in next slides
• Negative and significant: partial exit more likely than

full exit (and vice versa)
• Table 4 considers the extent of exit for all exits

together
• Table 5 considers the extent of exit for each exit

vehicle separately
• Important results summarized thereafter below

Table 4. Logit Estimates of the Extent of Exits in Canada and the United States
United States Canada Full Sample Estimates

Coefficient t-statistic p-value* Coefficient t-statistic p-value* Coefficient t-statistic p-value*
Constant 2.5415 1.7109 0.0871 2.3416 1.5120 0.1305 1.7849 2.0421 0.0411
IPO -0.5653 -0.8049 0.4209 -2.2167 -2.2954 0.0217 -1.1766 -2.4555 0.0141
Secondary Sale -0.0745 -0.0767 0.9389 -2.5584 -2.1063 0.0352 -1.0788 -1.7274 0.0841
Buyback -3.2569 -2.4566 0.0140 -0.4808 -0.5334 0.5938 -0.8364 -1.5009 0.1334
Write-off 1.5403 1.6986 0.0894 0.5694 0.4243 0.6714 1.1194 1.5491 0.1214
Technology -1.4559 -2.1294 0.0332 0.3345 0.4744 0.6352 -0.6341 -1.5760 0.1150
Duration -0.0542 -0.4343 0.6641 -0.0973 -1.2427 0.2140 -0.0851 -1.6360 0.1018
Market/Book 0.0514 0.7094 0.4781 -0.1694 -1.7701 0.0767 -0.0283 -0.5932 0.5530
Seed 0.5762 0.4564 0.6481 1.4040 0.8697 0.3844 0.9533 1.1733 0.2407
Start-up 1.7609 1.2686 0.2046 0.3771 0.3286 0.7425 1.4116 1.8354 0.0664
Early Stage 2.1683 1.5422 0.1230 -0.5629 -0.4531 0.6505 1.0899 1.3588 0.1742
Expansion 0.1150 0.0941 0.9250 0.4802 0.4262 0.6700 0.7645 1.0686 0.2852
Fundraising -0.0003 -1.2266 0.2200 0.0003 0.3842 0.7008 -0.0001 -0.9457 0.3443
* Two-sided test.

Table 5a. Logit Estimates of the Extent of Venture Capital IPO Exits in Canada and the United States

Constant -1.7464 -0.6011 0.5478 3.8845 1.4746 0.1403 -0.9414 -0.6502 0.5155
Technology -1.3741 -0.7716 0.4404 -1.0835 -0.6401 0.5221 -0.2668 -0.3236 0.7463
Duration 0.0232 0.1079 0.9141 0.0507 0.2950 0.7680 -0.0646 -0.6511 0.5150
Market/Book 0.1686 1.1524 0.2492 -0.5356 -2.3978 0.0165 -0.0269 -0.4409 0.6593
Seed -1.0031 -0.6911 0.4895 8.4458 1.8914 0.0586 0.2351 0.2283 0.8194
Start-up 0.9551 0.5821 0.5605 0.1227 0.1052 0.9162 0.7264 0.9571 0.3385
Early Stage 2.8746 1.4570 0.1451 -1.9273 -1.4485 0.1475 0.2104 0.2799 0.7795
Fundraising 0.00002 0.0255 0.9796 -0.0003 -0.1914 0.8482 0.0004 1.4318 0.1522
Market Conditions 4.3553 1.9961 0.0459 -1.3877 -0.8020 0.4225 1.1070 1.0651 0.2868
Preplanned Exit 1.9696 1.2263 0.2201 -0.6243 -0.3426 0.7319 1.1470 1.2025 0.2292
Table 5b. Logit Estimates of the Likelihood of Cash Consideration in Venture Capital Acquisition Exits in Canada and the United States

Constant 16.3158 2.0161 0.0438 3.9083 1.3993 0.1617 3.9789 2.9397 0.0033
Technology -5.7817 -1.7299 0.0836 N/A** N/A** N/A** -0.4488 -0.4577 0.6471
Duration -1.7639 -1.9076 0.0564 -0.1461 -0.6908 0.4897 -0.2197 -1.6636 0.0962
Market/Book -0.6524 -1.8228 0.0683 -0.0783 -0.1057 0.9158 -0.2134 -1.5004 0.1335
Market Conditions -1.8654 -0.9307 0.3520 N/A** N/A** N/A** -1.1553 -1.0449 0.2961
* Two-sided test.
** Not Applicable. Variable excluded to avoid collinearity problems. Similarly, variables not shown were excluded to avoid collinearity problems.

Table 5c. Logit Estimates of the Extent of Venture Capital Secondary Sale Exits in Canada and the United States

Constant 8.7239 0.8487 0.3960 -0.2319 -0.2139 0.8306 3.4863 1.4486 0.1474
Duration 0.1528 0.4005 0.6888 0.5147 1.0835 0.2786 0.2716 0.9795 0.3273
Market/Book -4.5011 -0.7136 0.4755 -0.1801 -0.6207 0.5348 -0.4544 -1.7349 0.0828
Fundraising -0.0014 -0.8524 0.3940 N/A** N/A** N/A** -0.0010 -1.2967 0.1947
Market Conditions -3.2965 -0.6533 0.5136 N/A** N/A** N/A** -1.7177 -1.0815 0.2795
Table 5d. Logit Estimates of the Extent of Venture Capital Buyback Exits in Canada and the United States

Constant -4.1615 -0.8387 0.4017 3.3246 1.8021 0.0715 4.9667 2.9692 0.0030
Technology N/A** N/A** N/A** -0.4461 -0.4109 0.6812 -0.0239 -0.0241 0.9808
Duration -1.0598 -0.4219 0.6731 -0.2537 -1.9289 0.0537 -0.2151 -1.8143 0.0696
Market/Book 1.7273 0.5900 0.5552 -0.0703 -0.3117 0.7552 -0.0309 -0.1558 0.8762
Fundraising N/A** N/A** N/A** 0.0017 1.2522 0.2105 -0.0014 -2.1257 0.0335
Preplanned N/A** N/A** N/A** -2.3292 -1.4464 0.1481 -1.9042 -1.3994 0.1617
Unsolicited Offer N/A** N/A** N/A** -1.0873 -0.7297 0.4656 -0.4738 -0.3403 0.7336
Table 5e. Logit Estimates of the Likelihood of Venture Capital Write-offs versus Write-downs in Canada and the United States

Constant 3.7177 2.0021 0.0453 5.9173 2.1892 0.0286 4.5620 3.3746 0.0007
Duration -0.2676 -0.7603 0.4471 -0.5285 -1.5436 0.1227 -0.4225 -1.7465 0.0807
Market Conditions 0.1290 0.0875 0.9303 N/A** N/A** N/A** 0.5814 0.4075 0.6836
* Two-sided test.
** Not Applicable. Variable excluded to avoid collinearity problems. Similarly, variables not shown were excluded to avoid collinearity problems.

European Exits Data
Conclusions (1 of 2)
• Partial Exits
 Mitigate informational asymmetries between the entrepreneurial
firm & its new owners
 But very little overlap in cross-country results – WHY?
• US:
 Partial exits for buybacks, buyouts, technology firms
• Canada – Greater Legal & Institutional Barriers:

 Greater need for partial exits for IPOs and secondary sales
 Inefficient exit strategies for longer VC duration, and technology firms

European Exits Data
Conclusions (2 of 2)
• Full/Partial Selection Effects:

 Affect the risk and return to venture capital
• US:
 Higher risk and higher return
 Less onerous securities regulation
 Private funds
• Canada:
 Lower risk and lower return
 More onerous securities legislation
 Government sponsorship of venture capital

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Exit Outcomes

Cumming and Johan (2009 Chapters 20 and 21)

Plus some supplementary material

© Cumming & Johan (2009) Exits

Venture Capital Exits

© Cumming & Johan (2009) Exits

What is a “Venture Capital Exit” ?

• The means by which venture capitalists (VCs) dispose of

© Cumming & Johan (2009) Exits

What Drives Choice of VC Exit?

1. Entrepreneurial firm characteristics

3. Cash flow and control rights between VC and

5. Legality and institutional factors across countries

© Cumming & Johan (2009) Exits

1. Entrepreneurial Firm Characteristics

• Transaction synergies with new owner(s)

© Cumming & Johan (2009) Exits

1. Firm Characteristics: Exit Vehicles and Info Asymmetry

Exit Vehicle New Owners Info

Secondary 3rd Party & 2

Writeoff --- N/A

© Cumming & Johan (2009) Exits

• LPs versus corporate

• Kliener Perkins versus “Fargo” VC Fund

• Connections with Investment Banks and/or Microsoft

© Cumming & Johan (2009) Exits

• Entrepreneurs have a non-pecuniary

• Weak VC control rights and common equity 

• Strong VC control rights and convertible

© Cumming & Johan (2009) Exits

• Significant factor in IPOs

• Also a significant factor in write-offs!

© Cumming & Johan (2009) Exits

5. Legality / Institutional Factors

© Cumming & Johan (2009) Exits

Canadian Exits Performance

Cumming and Johan (2009 Chapter 20)

© Cumming & Johan (2009) Exits

© Cumming & Johan (2009) Exits

Increases the probability of an IPO over an acquisition, as common equity

The fraction of the number of first-round investment

Higher probability of an IPO and acquisition as economic activity is greater

IPO Acquisition Secondary Sale Buyback Write-off

© Cumming & Johan (2009) Exits

© Cumming & Johan (2009) Exits

© Cumming & Johan (2009) Exits

© Cumming & Johan (2009) Exits

Marginal Marginal Marginal

Venture capital fund

Venture capital fund

Common Equity and/or

Log (1+MSCI Index in

Log (1+MSCI Index in

© Cumming & Johan (2009) Exits

Marginal Marginal Marginal

Venture capital fund

Common Equity and/or

Log (1+MSCI Index in

Log (1+MSCI Index in

© Cumming & Johan (2009) Exits

© Cumming & Johan (2009) Exits

Control Rights and VC Exits

Cumming and Johan (2009 Chapter 21)

© Cumming & Johan (2009) Exits