The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. We argue here that this is no accident – that venture capital can flourish especially – and perhaps only – if the venture capitalist can exit from a successful portfolio company through an initial public offering (IPO), which requires an active stock market. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers especially the importance of exit by venture capitalists and the opportunity, present only if IPO exit is possible, for the venture capitalist and the entrepreneur to enter into an implicit contract over control, in which a successful entrepreneur can reacquire control from the venture capitalist by using an IPO as the means of exit.
Banking and Finance Law | Business Organizations Law | Law
Center for Law and Economic Studies
Ronald J. Gilson & Bernard S. Black,
Does Venture Capital Require an Active Stock Market?,
Journal of Applied Corporate Finance, Vol. 11, No. 4, p. 36, 1999; Stanford Law School John M. Olin Program in Law & Economics Working Paper No. 174; Columbia Law School, The Center for Law & Economic Studies Working Paper No. 166
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