Recently, Dr. Sai LAN, Associate Professor of Innovation and Entrepreneurship and DBA Supervisor at emlyon Business School, published a new research paper titled “Venture capital exit after venture IPO” in the renowned Strategic Entrepreneurship Journal. This study provides an in-depth analysis of venture capital (VC) firms' equity retention strategies following the initial public offering (IPO) of their portfolio companies, offering fresh perspectives and insights into the field of investment strategy. Recognized by the Social Science Research Network (SSRN) as one of the top ten most downloaded papers in VC investment, this research highlights its substantial academic value and notable impact on investment practices.

Paper Overview: VC Equity Retention Strategies Through the Lens of Exchange Option Theory

This study investigates why Venture Capital firms (VCs) often retain equity in entrepreneurial ventures even after those ventures have gone public through an Initial Public Offering (IPO). Traditionally, VCs exit their investments at IPO to realize returns, but this research highlights a strategic decision to hold onto equity to potentially capitalize on the venture's future growth and valuation increases.

The core concept discussed in the paper is the "exchange option" theory. This theory conceptualizes the decision to retain equity as holding an option to trade the VCs' valuation of the venture for the market’s valuation at a later date. Retaining equity allows VCs to benefit from the upside potential if the market’s valuation exceeds their own. This is a strategic move especially when there are high levels of uncertainty and VCs possess private information suggesting the venture's value will increase.

The research suggests that two main factors influence the value of the exchange option and hence the decision to retain equity: Uncertainty and Private Information. Increased uncertainty in a venture’s industry heightens the value of the option to retain equity. Uncertainty here is broadly defined and can stem from various sources like market volatility, technological advancements, or regulatory changes. Meanwhile, VCs often have access to confidential information that is not available to the market. This could include detailed insights into the venture's operations, future products, or market strategies. Positive private information that is not yet reflected in the public valuation can encourage VCs to hold onto their shares.

The paper supports its findings with empirical data, indicating that VCs are more likely to retain equity when there is a combination of high industry uncertainty and positive private information. This suggests a strategic approach to maximizing investment returns by leveraging knowledge that is not available to the market.

Additionally, the study contributes to the broader understanding of post-IPO behaviors of VCs, providing insights into the strategic considerations that guide their exit decisions. It highlights how VCs are not just passive investors but are actively managing their investment positions to optimize returns.

In summary, this paper offers a new perspective on why VCs might choose to retain equity in IPO ventures, emphasizing the strategic role of exchange options under uncertainty and asymmetric information. It’s a significant addition to the literature on venture capital investment strategies, suggesting that VCs' decisions are influenced by their expectations of future market developments and their informational advantages. This work has implications not just for academics but also for practitioners in the venture capital and entrepreneurial finance fields.

About Professor Sai LAN

Sai LAN

Associate Professor of Innovation & Entrepreneurship
DBA Supervisor at emlyon business school Academic Director of EDP Program
Associate Operation Director of Business
Intelligence Center (BIC)

Dr. LAN has inter-disciplinary education background and rich work experiences in the IT industry in US, such as software architect for tech giant Motorola Inc., and several startup companies in Chicagoland. Dr. Lan earned his PhD in Strategy and Entrepreneurship from University of Illinois at Urbana-Champaign. Then he became a faculty member of Peking University HSBC Business School (PHBS) and served as the founding director of PHBS Research Center for Innovation & Entrepreneurship. Dr. LAN’s research interests focus on Innovation and Entrepreneurship, with special interests in digital platform, open source software ecosystems, and digital transformation.

Dr. LAN has many SSCI and CSSCI journal publications, peer-reviewed academic book chapters, and paper presentations in major academic conferences, including Best Paper Awards in AOM and AIB annual conferences. He used to serve as the Asia Representative for the Academy of Management (AOM) STR division. Dr. LAN provided media commentaries for Shenzhen TV, Phoenix TV, TV Korea, China Daily, Southern Daily, and Global Talents, etc. He also provided consulting and executive training services to companies like Huawei, Rolandberger, Accenture, Byte Dance, China Post, and many tech startups.

About the Strategic Entrepreneurship Journal

The Strategic Entrepreneurship Journal (SEJ), established in 2007 and published by Wiley on behalf of the Strategic Management Society, is recognized as a premier journal in the field of innovation and entrepreneurship research. Widely indexed in top academic directories for innovation and entrepreneurship management, including FT50 and AJG (ABS) 4, SEJ focuses on publishing high-quality research on global innovation and entrepreneurship, committed to rigorous scientific methods, theoretical foundations, and empirical data.