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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Venture Capital and Underpricing: Capacity Constraints and Early Sales
Roberto Pinheiro
Abstract

I present a model of the venture capital (VC) and public markets in which VCs suffer from capacity constraints, due to the shortage of skilled VC managers. Consequently, VC firms can only handle a limited number of new projects at once, having to take ongoing projects public in order to take advantage of new opportunities. This framework is able to match key features presented by the VC and initial public offer (IPO) empirical literatures: (1) VC-backed firms are younger, smaller, and less profitable at the IPO than their non-VC backed counterparts; (2) VC-backed IPOs are more underpriced than non-VC backed ones; (3) There is a positive relationship between underpricing and VC fundraising; (4) Small and young VC firms usually take portfolio firms public earlier than their large and mature counterparts; and (5) In hot IPO markets, VCs are more likely to take public both very young and small firms as well as mature and large firms, compared to cold markets. Differently, non-VC backed firms are usually smaller and younger in hot markets than in cold ones.


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Roberto Pinheiro, Venture Capital and Underpricing: Capacity Constraints and Early Sales, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1624, 14 Nov 2016, revised 25 Jul 2017.
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Keywords: IP; Venture Capital; Underpricing; Capacity Constraints
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