A Continuous-time Version Of Venture Capital Exit Decision

Venture capitalists invest in a project,acquire equity,then sell equity and obtain capital gains.It is very important for venture capital that how to ensure the return of successful investment is recovered smoothly and get out of bad investment as soon as possible.At the beginning of investment,venture capitalists begin to consider a reasonable exit strategy,because it is related to the realization of the whole investment activity income,determines the success of investment,and ensures the spatial liquidity and time continuity of venture capital.Appropriate exit decision is the necessary condition for successful exit.An effective exit mode promotes efficient capital circulation and lays a good foundation for subsequent capital inflow of venture capital companies.The exit decision of venture capital mainly considers two problems:the optimal exit way of venture capital and the optimal exit time of venture capital.In this doctoral dissertation,these two problems are brought into a model paradigm,and the principal-agent theory is applied to solve the problem of capital withdrawal.This doctoral dissertation gives some policy suggestions on accelerating capital withdrawal and promoting capital listing,and how to eliminate the “exit decision divergence” between the unilateral optimization of venture capitalists and the overall optimization of venture capital projects.Under the continuous time model,this doctoral dissertation studies the optimal incentive contract between venture capitalists and venture entrepreneurs under the two exit modes of IPO and M＆A.Finally,the corresponding optimal contract is used to solve the final exit value of investors under different exit modes.According to this value function,the best exit time of venture capital is calculated.Then,the optimal exit time is brought back to the exit value function to calculate the final exit earnings of investors under different exit modes.Finally,exit decision is made by comparative static analysis.Specifically,this dissertation studies the following contents:（1）First,we study a basic model.The long-term value of venture projects satisfies a simple algebraic Brownian motion,and there is only one venture entrepreneur.According to our analysis,whether M＆A or IPO,the equity incentive given by the optimal contract increases with the increase of exit time.At the same time,when the project is close to quitting,the efforts of venture entrepreneurs will increase,that is,temporary cramming.In terms of exit decision,the best exit time for investors to maximize returns lags behind that for social welfare maximization.In some cases,IPO is the way to ensure the maximization of social welfare,but investors tend to choose M＆A to exit.By using numerical simulation,we verify that by increasing production efficiency and reducing interest rate,venture capitalists’ optimal exit mode can converge with the exit mode of maximizing social welfare.（2）Because venture capital has the natural name-by-name effect,and according to the ”reputation incentive hypothesis”,we consider the value of reputation in the study of capital withdrawal.By dividing the efforts of entrepreneurs into two parts,the reputation of venture enterprises is included in the basic model.This dissertation studies the influence of reputation on optimal contract design,venture capital exit time and exit mode.According to our analysis: first of all,from the perspective of enterprise comprehensive governance,the agent makes efforts in both management and reputation.While increasing the final exit income,the comprehensive incentive cost that the principal needs to give is smaller than the sum of pure management incentive and reputation incentive.Therefore,venture entrepreneurs should make efforts in many aspects at the same time.Second,there is no temporary cramming of entrepreneurs’ efforts on reputation,which is the biggest difference from the basic model.The accumulation of reputation in accordance with the financial market lies in the practical experience in peacetime.Finally,in terms of capital exit decision-making,the increase of reputation stimulates capital to choose listing as the final exit method,and reduces the time of listing.It should be noted that our conclusion on reputation promoting venture capital listing coincides with the empirical results.（3）Starting from the real cases,we find that most venture enterprises have the ”co-founder” system.Therefore,we introduce the multi-agent problem into the capital exit model,and set two different incentive modes in the multi-agent problem.The purpose is to explore the influence of multi-agent neutral,multi-agent process oriented competition model,multi-agent results oriented competition mode on capital exit.The results show that: firstly,compared with the comprehensive agency model with only one agent,multiagent reduces the final income of VC,increases the agency cost and prolongs the exit time of capital.In order to slow down the agent friction,accelerate the capital withdrawal and improve the income,it is necessary for the principal to introduce the competition mode.Second,both result oriented competition and process oriented competition will increase capital exit earnings,accelerate capital maturity and reduce capital exit time.But VC can’t emphasize competition blindly.Different productivity,discount rate and risk aversion degree of agent will affect the optimal competition factor.Finally,we find that fair competition is unnecessary.This doctoral dissertation is a cross innovation between the choice of optimal exit mode of capital and the decision of optimal exit time of venture capital.The principal-agent theory is applied to answer two questions: the choice of venture capital exit mode and the choice of exit time.The results of the study have a certain reference value for the government to support the development of venture capital and guide the withdrawal of venture capital.