Lerner (1994): Venture Capitalists - PowerPoint PPT Presentation

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  1. 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.

  2. 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.

  3. 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).

  4. 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.

  5. 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.

  6. 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).