Venture Capital in Crisis: The Impact of the Economic Downturn in Company’s Time to Exit

Abstract

The collapse of many IT-related companies shocked venture capital investors around the world in 2000–2001. Similarly, the 2008–2009 financial crisis found VC investors very vulnerable. This article compares the financial and dot-com crises to investigate their effect on life cycle of investments from the initial investments to exit. An empirical analysis of 807 venture-backed firms that were exited between 2000 and 2009 uses a detailed sample of 2,716 transactions. Results show that time to exit has considerably increased. Further analysis of disaggregate data reveals that it is not only the time to exit that has increased throughout the years, but also the uncertainty as to the time that an exit should be expected. The source of venture capital (public or private) and the amount that a company raised before exit has no effect on the time to exit.

TOPICS: Financial crises and financial market history, developed markets, private equity, risk management