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Waiting for the Payday? The Market for Startups and the Timing of Entrepreneurial Exit

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  • Ashish Arora
  • Andrea Fosfuri
  • Thomas Roende

Abstract

Most technology startups are set up for exit through acquisition by large corporations. In choosing when to sell, startups face a tradeoff. Early acquisition reduces execution errors but later acquisition improves the likelihood of finding a better match since in the early market, there are fewer buyers because early acquisition requires costly absorptive capacity. Moreover, the buyer’s decision to invest in absorptive capacity is related to the startup’s decision about the timing of the exit sale. In this paper, we build a model to capture this complexity and the related tradeoffs. We find that the early market for startups is inefficiently thin if the timing of exit is a strategic choice, i.e. startups have to commit to whether to exit early or late. Too few startups are sold early, and too few buyers invest in absorptive capacity. Paradoxically, venture capital aggravates the inefficiency. However, if the timing of exit is a tactical choice, i.e. startups can choose to go late after observing the early offers, there are too many early acquisitions and too much investment in absorptive capacity by incumbents

Suggested Citation

  • Ashish Arora & Andrea Fosfuri & Thomas Roende, 2018. "Waiting for the Payday? The Market for Startups and the Timing of Entrepreneurial Exit," NBER Working Papers 24350, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24350
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    Cited by:

    1. Norbäck, Pehr-Johan & Persson, Lars & Svensson, Roger, 2017. "Verifying High Quality: Entry for Sale," Working Paper Series 1186, Research Institute of Industrial Economics.
    2. Carmen Cotei & Joseph Farhat & Indu Khurana, 2022. "The impact of policy uncertainty on the M&A exit of startup firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 99-120, January.
    3. Thomas, V.J. & Bliemel, Martin & Shippam, Cynthia & Maine, Elicia, 2020. "Endowing university spin-offs pre-formation: Entrepreneurial capabilities for scientist-entrepreneurs," Technovation, Elsevier, vol. 96.
    4. Jose Ramon Saura & Pedro Palos-Sanchez & Antonio Grilo, 2019. "Detecting Indicators for Startup Business Success: Sentiment Analysis Using Text Data Mining," Sustainability, MDPI, vol. 11(3), pages 1-14, February.
    5. Seyedeh Samaneh Seyedi & Abolfazl Darroudi, 2023. "Personality as a Key Determinant of the Organizational Silence in Iranian Start-Ups," E&M Economics and Management, Technical University of Liberec, Faculty of Economics, vol. 26(1), pages 65-77, March.

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    More about this item

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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