The Corporate Venture Capital Exit Decision

This paper investigates an entrepreneur who decides whether to obtain funds from an independent venture capital firm (IVC) or a corporate venture capital firm (CVC) to develop an innovative product. In case of success, the entrepreneur enters a market and competes with an incumbent. The CVC is a subsidiary of an input producer. This input will be required by both the entrepreneur and the incumbent to produce their products. I analyze three different exit routes: (1) IPO, (2) Trade Sale via incumbent and (3) Trade Sale via input producer. I show that the CVC does not exit via a Trade Sale to its parental company due to a loss of demand for the input good. Moreover, I find that the IVC exits more innovative ventures more likely via an IPO, in comparison with the CVC. The analysis generates a number of empirical implications for the difference between IVCs and CVCs and the link between CVCs and the Trade Sale decision of their parental companies.