When should venture capitalists exit their investee companies?

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.

Citation

Li, X., Huat Tan, H., Wilson, C. and Wu, Z. (2013), "When should venture capitalists exit their investee companies?", International Journal of Managerial Finance, Vol. 9 No. 4, pp. 351-364. https://doi.org/10.1108/IJMF-01-2013-0003