A dynamic model for venture capitalists' entry-exit investment decisions

In this paper, we develop a dynamic model to study the entry and the exit decision for a VC facing the opportunity to invest and expand a start-up firm. Two settings are considered. A benchmark-setting, where no time constraints for exiting are in place, is compared with the one where, realistically, the VC has a finite time-window to disinvest. In both cases, we consider the trade sale (M&A) as the exit route. The model returns the entry and the exit triggers, the optimal post-money ownerships, the expected cash multiple for the VC, and also proposes a new time-adjusted version of the cash multiple, useful for measuring, ex-ante, the expected performance of the investment. The model aims to guide the VCs when analyzing their investment opportunities, considering the entire VC's business-cycle (entry-expand-exit). Finally, the model is applied to a hypothetical, but realistic, situation in order to discuss the main outcomes. A comparative statics analysis is also performed. (C) 2020 Elsevier B.V. All rights reserved.