Lerner (1994): Venture Capitalists

1
Lerner (1994) Venture Capitalists

• Ritter (1984, 1991) More IPOs when the stock
  market is high.
• Greater financing activity when real investment
  activities are good.
• Substitution of public equity for private equity
  when the stock market is high.

2
Lerner (1994) Venture Capitalists

• Biotechnology Industry
• Products take long (gt 10 years) to bring to
  market.
• Do not include large up-front costs in building
  manufacturing facilities.
• Remain in RD phase until well after going
  public.
• Venture capitalists provide funds in stages.
• Each financing round is accompanied by a formal
  review of the firms status.
• Each round involves an explicit decision to go
  public or remain private.
• Hence, venture investors in the biotechnology
  industry have the opportunity to time their IPO
  according to market conditions.

3
Lerner (1994) Venture Capitalists

• Table 2
• Venture-backed IPOs in the biotech industry are
  made when
• Biotech stock index is higher.
• The biotech stock index has risen about 9.9 in
  the previous quarter.
• Subsequently, the biotech index falls by 4.6 (in
  the next quarter).
• Venture capitalists in the biotech industry seek
  private equity when
• Biotech stock index is lower.
• the biotech stock index has risen about 4.6 in
  the previous quarter.
• Subsequently, the biotech index rises by another
  6.1 (in the next quarter).

4
Lerner (1994) Venture Capitalists

• Table 2 Venture-capitalists in the biotech
  industry appear to have the ability to time the
  (biotech) stock market.
• A picture is worth a thousand words.
• Figures 1 and 2.
• Table 3 Evidence that results noted in Table 2
  are statistically significant.

5
Lerner (1994) Venture Capitalists

• Venture Capitalist Experience
• VCs syndicate investments to their peers or less
  experienced counterparts.
• Lead VC is usually the most experienced.
• VCs not likely to invest in deals initiated by
  their less experienced counterparts.

6
Lerner (1994) Venture Capitalists

• Table 5
• IPOs backed by more experienced venture
  capitalists further emphasizes the results in
  Table 2.
• Biotech stock index is higher (for more
  experienced VCs).
• The biotech stock index has risen by more in the
  previous quarter.
• Subsequently, the biotech index falls by more (in
  the next quarter).