When should venture capitalists exit their investee companies?

Abstract

Purpose: Exit strategies are critical for external private equity holders, such as venture capitalists and business angels, to receive investment returns successfully. The paper models the exit decision as a fixed date with the option to exit early, and develop an approach to help private equity holders determine an optimal early exit region based on a target equity value and the time remaining. Design/methodology/approach: The paper sets up a continuous time model to derive analytical solutions and apply simulations to numerical examples in this study. Findings: By numerically analyzing the nature of the solution the paper illustrates that a higher return drift of the investee company, a lower return volatility of the investee company, and a higher target return of the private equity holder results a smaller early exit region. Originality/value: This study helps determine the optimal time of stopping investments, and provides venture capitalists with a usable way to make exit decisions.