© Cumming & Johan (2013)Exits Exit Outcomes Cumming and Johan (2013 Chapter 21) Plus some supplementary material 1.

© Cumming & Johan (2013)Exits Venture Capital Exits Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits IPOs Acquisitions Secondary Sales Buybacks Write-offs 2

© Cumming & Johan (2013)Exits What is a “Venture Capital Exit” ? Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits The means by which venture capitalists (VCs) dispose of their investments (recall introductory statistics lecture) Exit Types » IPO » Merger/Acquisition » Secondary Sale » Buyback » Writeoff 3

© Cumming & Johan (2013)Exits What Drives Choice of VC Exit? Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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 4

© Cumming & Johan (2013)Exits 1. Entrepreneurial Firm Characteristics Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Entrepreneurial firm characteristics VC characteristics Cash flow and control rights between VC and entrepreneur Market conditions Legality and institutional factors across countries 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 5

© Cumming & Johan (2013)Exits 1. Firm Characteristics: Exit Vehicles and Info Asymmetry Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Entrepreneurial firm characteristics VC characteristics Cash flow and control rights between VC and entrepreneur Market conditions Legality and institutional factors across countries Exit VehicleNew OwnersInfo Asymmetry IPOPublic Shareholders 1 (Most Pronounced) Acquisition3 rd Party3 Secondary Sale 3 rd Party & Entrepreneur 2 BuybackEntrepreneur4 Writeoff---N/A 6

© Cumming & Johan (2013)Exits 2. VC Characteristics Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Entrepreneurial firm characteristics VC characteristics Cash flow and control rights between VC and entrepreneur Market conditions Legality and institutional factors across countries LPs versus corporate & versus Government funds! Kliener Perkins versus “Fargo” VC Fund Fund Capital Connections with Investment Banks and/or Microsoft type companies 7

© Cumming & Johan (2013)Exits 3. Control Rights Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Entrepreneurial firm characteristics VC characteristics Cash flow and control rights between VC and entrepreneur Market conditions Legality and institutional factors across countries 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? 8

© Cumming & Johan (2013)Exits 4. Market conditions Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Entrepreneurial firm characteristics VC characteristics Cash flow and control rights between VC and entrepreneur Market conditions Legality and institutional factors across countries Significant factor in IPOs – 1999 – April 14, 2000 Also a significant factor in write-offs! – Post April 14, 2000 9

© Cumming & Johan (2013)Exits 5. Legality / Institutional Factors Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Entrepreneurial firm characteristics VC characteristics Cash flow and control rights between VC and entrepreneur Market conditions Legality and institutional factors across countries Legal – Quality of shareholder rights – Corruption – Contract repudiation – Rule of Law – Efficiency of Judiciary Institutional – Size of country’s stock market 10

© Cumming & Johan (2013)Exits Control Rights and VC Exits Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Cumming and Johan (2013 Chapter 21) 11

© Cumming & Johan (2013)Exits Data Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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. 12

© Cumming & Johan (2013)Exits Table 21.5. Multinomial Logit Regressions (selected variables excluded to fit on this slide) IPOAcquisitionBuybackWrite-offIPOAcquisitionBuybackWrite-off Constant-0.6133.173*-0.013-1.260-1.0563.259*0.226-0.984 Investor Characteristics Log (Fund Capital)-0.011-0.036-0.047**-0.0010.030-0.108-0.050*0.037 Non-Captive VC Fund-0.004-0.221*0.103**0.0480.058-0.214*0.084*0.012 Transaction Characteristics Log (Private Investment Value)0.019-0.0430.0050.0390.014-0.0310.0040.023 Prior Rounds0.0290.282**-0.019-0.301**0.0300.395**-0.019-0.413** Replace CEO-0.0680.386***0.024-0.159-0.0680.236*0.036-0.028 Majority Board-0.106**0.237***-0.0390.035-0.092*0.184*-0.0430.082 Majority Vote 0.040-0.0590.006-0.085 Control Rights Index -0.066**0.122**0.014-0.072 Veto Rights 0.0110.056-0.008-0.052 Market Characteristics Log (MSCI 0-3 Months)1.007***-1.668***0.2900.3660.916***-1.682**0.2540.603 Investment Year Dummies?Yes Institutional and Legal Variables Log (Legality)-0.026-0.8330.1100.2030.046-0.7870.0600.116 Log (Market Capitalization)0.052*0.0630.0140.0030.0220.0930.0130.005 Country Dummies?Yes 14

© Cumming & Johan (2013)Exits Some Key Findings Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Strong VC control rights  Acquisition Weak VC control rights / common equity  IPO Why? 15

© Cumming & Johan (2013)Exits Puzzle Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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? 16

© Cumming & Johan (2013)Exits Canadian Exits Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Cumming and Johan (2008 Venture Capital) 18

© Cumming & Johan (2013)Exits Summary Testable Hypotheses This table summarizes the central hypotheses and describes the variables used to test the hypotheses. Hypo- thesis # Variable DescriptionHypothesized Effect on Exit Outcomes Venture Capital Characteristics Limited Partnership Venture Capitalist 20.1 The fraction of the number of limited partnership venture capital funds that were syndicated venture capital funds at the first round investment. IPOs and acquisitions are more likely than secondary sales, buybacks and write-offs for limited partnership venture capital funds. Corporate Venture capital fund 20.2 The fraction of the number of corporate venture capital funds that were syndicated venture capital funds at the first round investment. Acquisitions are more likely than IPOs as the corporate venture capital has strategic incentives to invest. Government Venture capital fund 20.3 The fraction of the number of government venture capital funds that were syndicated venture capital funds at the first round investment. Weaker governance structure associated with government funds, and therefore a greater probability of secondary sales, buybacks and write-offs. Number of Syndicated Venture capital funds 20.4 The number of syndicated venture capital funds in the first round investment. A greater number of syndicate venture capital funds will reduce adverse selection problems and facilitate value added, thereby increasing the probability of an IPO Entrepreneurial Firm Characteristics Life Science Industry20.5 A dummy variable equal to one for firms in one of the life sciences industries (biotechnology or medical) Increases the probability of an IPO, as IPO investors often have an appetite for technology companies Other High-Tech Industry 20.5 A dummy variable equal to one for firms in one of the high- tech industries other than the life sciences industries. Increases the probability of an IPO, as IPO investors often have an appetite for technology companies Seed or Early Stage20.6 A dummy variable equal to one for seed or early stage investments in the first round of investment Higher probability of a write-off as risks are greater the earlier the stage of investment Expansion Stage20.6 A dummy variable equal to one for expansion stage investments in the first round of investment Lower risks relative to seed and early stage investments, and therefore a lower probability of a write-off Entrepreneur Capital Requirements [Log (Deal Size)] 20.7 The log of the amount invested in the first round investment across all syndicated venture capital funds, in thousands of 2004 Canadian dollars. Larger investments are more likely to go public as there are minimum capital requirements for listing. Venture capital fund and Entrepreneur in Same Province 20.8 A dummy variable equal to one if the venture capital fund and the entrepreneur were located with the same province at the time of first round investment Higher probability of an IPO and acquisition as adverse selection problems are mitigated and value-added facilitated by regional proximity. 19

© Cumming & Johan (2013)Exits Summary Testable Hypotheses (Continued) Hypo- thesis # Variable DescriptionHypothesized Effect on Exit Outcomes Transaction Characteristics Common Equity and/or Warrants 20.9 The fraction of the number of first-round investment securities in the form of common equity and/or warrants. If only common equity was used then the variable equals 1, and if common equity was not used then the variable equals 0. Increases the probability of an IPO over an acquisition, as common equity signals favorable information to the public market. As well, higher quality entrepreneurs are more likely to negotiate common equity contracts. Further, entrepreneurs typically have stronger control rights when the venture capital fund uses common equity, and therefore entrepreneurs with a non-pecuniary preference for an IPO are less likely to be acquired than go public. Convertible Securities20.10 The fraction of the number of first-round investment securities in the form of convertible preferred equity and/or convertible debt. If only convertible securities were used then the variable equals 1, and if convertible securities were not used then the variable equals 0. Provides incentives for the venture capital fund to add value and thereby increase the probability of both IPOs and acquisitions over secondary sales, buybacks and write-offs. Control Variables: Institutional and Economic Conditions EntrepreneurA dummy variable equal to one for an entrepreneur based in Higher probability of an IPO and acquisition as economic activity is greater in the of and than other provinces. EntrepreneurA dummy variable equal to one for an entrepreneur based in Higher probability of an IPO and acquisition as economic activity is greater in the of and than other provinces. Log (1+MSCI Index in Year of Exit) The log of 1+ the Morgan Stanley Capital International stock index return for in the year of exit Higher probability of an IPO or acquisition in boom market conditions; greater probability of secondary sales, buybacks and write-offs in bad market conditions Log (1+MSCI Index in Year Prior to Exit) The log of 1+ the Morgan Stanley Capital International stock index return for in the year prior to exit Higher probability of an IPO or acquisition in boom market conditions; greater probability of secondary sales, buybacks and write-offs in bad market conditions Dummy for Exit in 1999A dummy variable equal to one for exits in 1999 Higher probability of an IPO or acquisition in boom market conditions; greater probability of secondary sales, buybacks and write-offs in bad market conditions Dummy for Exit in 2000A dummy variable equal to one for exits in 2000 Higher probability of an IPO or acquisition in boom market conditions; greater probability of secondary sales, buybacks and write-offs in bad market conditions 20

© Cumming & Johan (2013)Exits RegressionsIPOAcquisitionSecondary SaleBuybackWrite-off Panel A (Condensed) Marginal Effectt-statisticMarginal Effectt-statistic Marginal Effect t-statisticMarginal Effectt-statistic Marginal Effect t-statistic Constant-0.127-2.476**-0.146-0.6220.0620.512-0.131-0.7040.3421.777* Venture capital fund Fund Characteristics Limited Partnership Venture capital fund 0.0242.081**0.1612.394**-0.071-1.524-0.013-0.216-0.101-1.630 Number of Syndicated Venture capital funds 1.202E-050.0040.0160.6390.0030.221-0.057-2.413**0.0381.800* Entrepreneurial Firm Characteristics Life Science Industry0.0362.349***0.3994.231***-0.104-2.039**-0.259-3.404***-0.072-0.929 Other High-Tech Industry 0.0050.5040.3564.938***-0.071-2.032**-0.243-4.635***-0.046-0.822 Seed or Early Stage-0.032-2.172**0.0680.659-0.122-3.021***0.0090.1390.0760.880 Expansion Stage-0.016-1.465-0.005-0.049-0.107-2.547**0.0270.3880.1011.127 Log (Deal Size)0.0092.030**0.0311.219-0.007-0.6030.0231.261-0.055-2.757*** Venture capital fund and Entrepreneur in Same Province 0.0361.785*-0.112-1.1480.0690.8990.1041.028-0.097-1.127 Transaction Characteristics Common Equity and/or Warrants 0.0221.966**-0.004-0.0620.0611.870*-0.074-1.464-0.005-0.092 Convertible Securities-0.008-0.601-0.007-0.080-0.019-0.370-0.017-0.2590.0500.749 Economic Conditions Ontario Entrepreneur-0.015-1.3540.0120.155-0.112-2.103**0.0841.0790.0300.410 Quebec Entrepreneur-0.014-1.472-0.309-3.935***0.0491.1700.2193.081***0.0550.801 Log (1+MSCI Index in Year of Exit) -0.049-1.847*-0.118-0.9240.0340.5060.0980.9530.0340.325 Log (1+MSCI Index in Year Prior to Exit) 0.0070.2960.1371.135-0.062-1.0190.1962.197**-0.278-2.665*** Dummy for Exit in 19990.0492.211**0.3582.337**0.0240.391-0.452-2.551**0.0210.175 Dummy for Exit in 20000.0281.954*0.0280.326-0.081-1.498-0.265-3.638***0.2904.291*** 25

© Cumming & Johan (2013)Exits RegressionsIPOAcquisitionSecondary SaleBuybackWrite-off Panel B (Condensed) Marginal Effect t-statisticMarginal Effectt-statisticMarginal Effectt-statisticMarginal Effectt-statisticMarginal Effectt-statistic Constant-0.107-2.296**0.0550.232-0.028-0.348-0.241-1.2290.3211.570 Venture capital fund Fund Characteristics Corporate Venture capital fund 0.0151.2020.2822.362**-0.351-3.102***-0.136-1.2360.1911.902* Government Venture capital fund or LSVCC -0.021-1.841*-0.229-3.137**0.0712.047**0.1462.309**0.0340.503 Number of Syndicated Venture capital funds 0.0000.0820.0060.2120.0141.562-0.053-2.142**0.0341.503 Entrepreneurial Firm Characteristics Life Science Industry0.0392.312**0.4104.185***-0.071-1.882*-0.268-3.405***-0.110-1.305 Other High-Tech Industry 0.0070.7020.3324.389***-0.040-1.630-0.229-4.165***-0.070-1.126 Log (Deal Size)0.0081.951*0.0261.013-0.004-0.5150.0261.361-0.056-2.660*** Transaction Characteristics Common Equity and/or Warrants 0.0252.039**0.0140.2060.0351.522-0.071-1.331-0.003-0.051 Convertible Securities-0.007-0.478-0.027-0.321-0.008-0.2620.0100.1480.0320.448 Economic Conditions Log (1+MSCI Index in Year of Exit) -0.050-1.801*-0.103-0.7810.0180.4140.0990.9190.0360.320 Log (1+MSCI Index in Year Prior to Exit) 0.0000.0140.1301.045-0.033-0.8460.2112.251**-0.309-2.759*** Dummy for Exit in 19990.0532.257**0.3882.455**0.0040.093-0.462-2.562**0.0170.138 Dummy for Exit in 20000.0312.004**0.0420.462-0.070-1.768*-0.318-4.120***0.3154.361*** 26

© Cumming & Johan (2013)Exits Summary Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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 27

© Cumming & Johan (2013)Exits Some Further Evidence… Asia Pacific Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Cumming, Fleming & Schwienbacher (2006, Journal of Corporate Finance) 28

© Cumming & Johan (2013)Exits Core Research Question Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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 30

© Cumming & Johan (2013)Exits Competing Theories Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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 31

© Cumming & Johan (2013)Exits Cumming Fleming Schwienbacher 2006 Journal of Corporate Finance Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 1 st 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 32

© Cumming & Johan (2013)Exits Central Findings in this Paper Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits 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) 33

© Cumming & Johan (2013)Exits Primary Competing Hypotheses Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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 34

© Cumming & Johan (2013)Exits Control Variables Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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 35

© Cumming & Johan (2013)Exits Data Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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) 36

Table 2. Countries Represented in the Exits Database, and the Legality Components CountryLegality Total Market Capitalization (Billions US$) Average IRR Median IRR # IPOs # Private Exits # Write- offs # Unexited Investments New Zealand21.5519.690.9050.36541001 Asia-Pacific VC Inv. in US 20.8512380.030.4800.0649492138 Australia20.44242.260.1640.18927432322 Singapore19.53130.420.3410.1451732 Hong Kong19.11278.95-0.0560.07021138 Malaysia16.67108.65-0.168 0100 India12.80213.191.020 2100 Thailand12.9470.02-0.101 0930 China19.23461.42-0.0630.08421222 Taiwan17.62388.130.7230.4453139062 South Korea14.23260.000.1450.2500300 Indonesia9.1625.68-0.029-0.01501400 Philippines8.5113.04-0.003 0100 39

© Cumming & Johan (2013)Exits Table 3. Difference Tests and Summary Statistics Characteristic Tested# Firms Proportion of IPO Exits Difference Test Statistic Full Sample4680.167 Average Legality Index > 20 (Excluding US and Taiwan)1320.235 2.303** Average Legality Index < 20 (Excluding US and Taiwan)870.080 Average Market Cap. > 300 (Excluding US and Taiwan)220.182 0.082 Average Market Cap. < 300 (Excluding US and Taiwan)1970.173 US Only1170.077 -2.574** Taiwan1320.235 US Only1170.077 -2.488** Australia1150.235 Taiwan1320.235 0.001 Australia1150.235 Taiwan1320.235 1.990** All Other Countries Excluding US, Australia1040.106 40

© Cumming & Johan (2013)Exits Regressions (Tables 5 – 7) Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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 41

© Cumming & Johan (2013)Exits Multinomial Logit Regressions Probability IPO Probability Private Exit Probability Write-off Log (Legality) Log (Market Cap) Market Conditions: MSCI Variables VC Fund Characteristics: Captive VC Log (VC Fund Capital) Ent. Firm / Trans Char.: Industry Market / Book Log (Book Value) Syndication Co-Investment 0.854** -0.0001 0.216 -0.030 0.181*** 0.080** -0.008 0.073 0.001 -1.389*** -0.058 -0.895*** -0.018 -0.217*** -0.070 0.015* 0.015 0.0001 -0.150 -0.011 0.352** 0.089** -0.051** 0.008 -0.002 -0.084* 0.002*** 42

© Cumming & Johan (2013)Exits Heckman Like 2-Step Sample Selection Models Probability of Exit (versus no exit)Probability of IPO Exit Log (Legality) Log (Market Cap) Market Conditions MSCI Variables VC Fund Characteristics Captive VC Log (Fund Capital) Ent Firm / Transaction Char Industry Market / Book Book Value Investment Year DummiesLater Years Negative *** 0.704*** 0.057 0.168 -0.114* 0.128*** 0.079** -0.010 43

© Cumming & Johan (2013)Exits Primary Results Re Legality Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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% 44

© Cumming & Johan (2013)Exits Central Findings in this Paper Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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) 45

© Cumming & Johan (2013)Exits Outliers and Further Research Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion 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 46

© Cumming & Johan (2013)Exits Now…Full versus Partial Exits Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full 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 47

© Cumming & Johan (2013)Exits Full and Partial VC Exits Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion IPO, Secondary Sale and Buyback Exits: Full: dispose of investment within 1 year of 1 st distribution; Partial: more than 1 year Acquisition Exits: Full: cash payment Partial: (illiquid) shares Write-off Exits: Full: liquidation Partial: write-down 48

© Cumming & Johan (2013)Exits Research Questions Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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? 49

© Cumming & Johan (2013)Exits Contributions Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 50

© Cumming & Johan (2013)Exits VC Exit Strategies Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 51

© Cumming & Johan (2013)Exits Exit VehicleNew OwnersInfo Asymmetry IPOPublic Shareholders 1 (Most Pronounced) Acquisition3 rd Party3 Secondary Sale3 rd Party & Entrepreneur 2 BuybackEntrepreneur4 Write-off---N/A Exit Vehicles and Info Asymmetry Info asymmetry  Partial Exits 52

© Cumming & Johan (2013)Exits Entrepreneurial Firm Characteristics -Market & Book Value -Technology Firm -Stage of Development -Other Institutional and Regulatory Environment -Securities Regulation -Government Sponsorship of Venture Capital -Other Venture Capital Investment Duration Venture Capital Exit Vehicle Extent of Venture Capital Exit 53

© Cumming & Johan (2013)Exits Investment Duration and Exit Strategy Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 54

© Cumming & Johan (2013)Exits Firm Characteristics & Exit Strategy Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion Asset intangibility  greater informational asymmetry  partial exit Buyout transactions: VC facilitates transfer of ownership interest through a partial exit Other firm characteristics … 55

© Cumming & Johan (2013)Exits Legal & Institutional Barriers to Efficient Exit Strategies Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 56

© Cumming & Johan (2013)Exits Securities Regulation & Institutional Differences Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion  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 57

© Cumming & Johan (2013)Exits Data Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 112 U.S. Exits (Table 1a) Source: Venture Economics 1992-1995 (Approx 10% of Industry Exits) 134 European Exits (Table 1b) Source: Macdonald & Associates 1992-1995 (Approx 32% of Industry Exits) 58

© Cumming & Johan (2013)Exits Data Limitations Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 59

© Cumming & Johan (2013)Exits Differences in exit performance between Canada and U.S. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 61

© Cumming & Johan (2013)Exits Tables in next slides Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 62

© Cumming & Johan (2013)Exits Conclusions (1 of 2) Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 66

© Cumming & Johan (2013)Exits Conclusions (2 of 2) Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion 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 67

© Cumming & Johan (2013)Exits Exit Outcomes Cumming and Johan (2013 Chapter 21) Plus some supplementary material 1.

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© Cumming & Johan (2013)Exits Exit Outcomes Cumming and Johan (2013 Chapter 21) Plus some supplementary material 1.

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Presentation on theme: "© Cumming & Johan (2013)Exits Exit Outcomes Cumming and Johan (2013 Chapter 21) Plus some supplementary material 1."— Presentation transcript:

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