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Shadow capital in venture financing: Selection, valuation, and exit dynamic

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  • Cumming, Douglas
  • Dai, Na

Abstract

Non-venture capital private equity funds (PEs) have become increasingly interested in investing in entrepreneurial firms. We investigate how PEs invest and perform in comparison to VCs, and the implication of PEs’ participation on ventures. We show that PEs are more likely to invest in ventures after typical investment period and when there was substantial capital overhang. PEs prefer the expansion and late-stage ventures. Investment size and valuation are larger/higher with PEs’ participation. We further find that IPOs and secondary buyout are more prevalent among ventures with PE investments. PEs’ participation also allows ventures more time to get ready for exit.

Suggested Citation

  • Cumming, Douglas & Dai, Na, 2024. "Shadow capital in venture financing: Selection, valuation, and exit dynamic," Journal of Empirical Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000495
    DOI: 10.1016/j.jempfin.2024.101514
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    References listed on IDEAS

    as
    1. Lukas Koenig & Hans-Peter Burghof, 2022. "The Investment Style Drift Puzzle and Risk-Taking in Venture Capital," Review of Corporate Finance, now publishers, vol. 2(3), pages 527-585, December.
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    7. Aldatmaz, Serdar & Celikyurt, Ugur, 2023. "The effect of venture capital backing on innovation in newly public firms," Journal of Empirical Finance, Elsevier, vol. 74(C).
    8. Gao, Xiaohui & Ritter, Jay R. & Zhu, Zhongyan, 2013. "Where Have All the IPOs Gone?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(6), pages 1663-1692, December.
    9. Lahr, Henry & Trombley, Timothy E., 2020. "Early indicators of fundraising success by venture capital firms," Journal of Corporate Finance, Elsevier, vol. 65(C).
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    More about this item

    Keywords

    Venture capital; Private equity; Capital overhang; Valuation; Exit;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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