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Lerner (1994): Venture Capitalists Ritter (1984, 1991): More IPOs when the stock market is “high.” Greater financing activity when real investment activities are good. Substitution of public equity for private equity when the stock market is high. Lerner (1994): Venture Capitalists

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Lerner (1994): Venture Capitalists

  • Ritter (1984, 1991): More IPOs when the stock market is “high.”

    • Greater financing activity when real investment activities are good.

    • Substitution of public equity for private equity when the stock market is high.


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Lerner (1994): Venture Capitalists

  • Biotechnology Industry

    • Products take long (> 10 years) to bring to market.

    • Do not include large up-front costs in building manufacturing facilities.

    • Remain in R&D phase until well after going public.

    • Venture capitalists provide funds in stages.

      • Each financing round is accompanied by a formal review of the firm’s status.

      • Each round involves an explicit decision to go public or remain private.

  • Hence, venture investors in the biotechnology industry have the opportunity to time their IPO according to market conditions.


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Lerner (1994): Venture Capitalists

  • Table 2

    • Venture-backed IPOs in the biotech industry are made when

      • Biotech stock index is higher.

      • The biotech stock index has risen about 9.9% in the previous quarter.

      • Subsequently, the biotech index falls by 4.6% (in the next quarter).

    • Venture capitalists in the biotech industry seek private equity when

      • Biotech stock index is lower.

      • the biotech stock index has risen about 4.6% in the previous quarter.

      • Subsequently, the biotech index rises by another 6.1% (in the next quarter).


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Lerner (1994): Venture Capitalists

  • Table 2: Venture-capitalists in the biotech industry appear to have the ability to time the (biotech) stock market.

  • A picture is worth a thousand words.

    • Figures 1 and 2.

  • Table 3: Evidence that results noted in Table 2 are statistically significant.


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Lerner (1994): Venture Capitalists

  • Venture Capitalist Experience

    • VCs syndicate investments to their peers or less experienced counterparts.

    • Lead VC is usually the most experienced.

      • VCs not likely to invest in deals initiated by their less experienced counterparts.


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Lerner (1994): Venture Capitalists

  • Table 5

    • IPOs backed by more experienced venture capitalists further emphasizes the results in Table 2.

      • Biotech stock index is higher (for more experienced VCs).

      • The biotech stock index has risen by more in the previous quarter.

      • Subsequently, the biotech index falls by more (in the next quarter).


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