Exit Outcomes

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

2. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Venture Capital Exits IPOs Acquisitions Secondary Sales Buybacks Write-offs 2

3. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits What is a “Venture Capital Exit” ? • 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

4. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits What Drives Choice of VC Exit? • Entrepreneurial firm characteristics • VC characteristics • Cash flow and control rights between VC and entrepreneur • Market conditions • Legality and institutional factors across countries 4

5. 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 1. Entrepreneurial Firm Characteristics • 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

6. 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 1. Firm Characteristics: Exit Vehicles and Info Asymmetry 6

7. 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 2. VC Characteristics • LPs versus corporate • & versus Government funds! • Kliener Perkins versus “Fargo” VC Fund • Fund Capital • Connections with Investment Banks and/or Microsoft type companies 7

8. 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 3. Control Rights • 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

9. 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 4. Market conditions • Significant factor in IPOs • 1999 – April 14, 2000 • Also a significant factor in write-offs! • Post April 14, 2000 9

10. 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 5. Legality / Institutional Factors • Legal • Quality of shareholder rights • Corruption • Contract repudiation • Rule of Law • Efficiency of Judiciary • Institutional • Size of country’s stock market 10

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

12. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Data • 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

13. Securities Used by Year of Investment in European Data (Chapter 21) 40 35 30 25 Total Number per Year 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 Year Straight Debt or Straight Preferred Preferred or Debt and Common Common Equity Convertible Debt or Convertible Preferred Equity 13

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15. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Some Key Findings • Strong VC control rights  Acquisition • Weak VC control rights / common equity  IPO • Why? 15

16. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Puzzle • 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

17. Supplementary Material VC exits from other parts of the world 17

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

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27. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Summary • 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

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

29. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Venture Capital (“VC”) Exits Private Exits 29

30. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Core Research Question • Does legality affect VC exit outcomes? • IPO • private sale (acquisition, secondary sale, buyback) • write-off • Related questions in companion work: • Does legality affect investment decisions • Does legality affect decision to move company from Asia-Pacific to the United States 30

31. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Competing Theories • 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

32. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Cumming Fleming Schwienbacher 2006 Journal of Corporate Finance • 1st 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

33. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Central Findings in this Paper • Legality facilitates VC-backed firms achieving IPO (supports Shleifer and Wolfenzon 2002 JFE) • Size of a country’s stock market unrelated to probability of an IPO (reject Black & Gilson 1998 JFE) • VC-backed firms also more likely to go IPO when: • Higher market/book frims • Larger firms • Limited partnership VCs (not captive VCs) • VCs with more capital (reputation) 33

34. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion Primary Competing Hypotheses • 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

35. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion Control Variables • 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

36. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion Data • 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

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

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44. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion Primary Results Re Legality • 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

45. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion Central Findings in this Paper • Legality facilitates VC-backed firms achieving IPO (supports Shleifer and Wolfenzon 2002 JFE) • Size of a country’s stock market unrelated to probability of an IPO (reject Black & Gilson 1998 JFE) • VC-backed firms also more likely to go IPO when: • Higher market/book frims • Larger firms • Limited partnership VCs (not captive VCs) • VCs with more capital (reputation) 45

46. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Hypotheses Data Empirical Tests Conclusion Outliers and Further Research • 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

47. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Now…Full versus 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

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

49. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion Research Questions Does the extent of VC exit depend on: • Characteristics of Entrepreneurial Firm? • Duration of Venture Capital Investment? • Exit vehicle selected? • Regulatory Environment? 49

50. Exits – Definitions and Overview European Exits Canadian Exits Australasian Exits US versus Canada Full Partial Exits Definitions Hypotheses Data Empirical Tests Conclusion Contributions 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