Exit Strategies of Venture Capitalists in Hot Issue Markets: Evidence from the “Neuer Markt" in Germany

In this study we analyze the IPO exit behavior of venture capitalists (VCs) in the Neuer Markt, the former market for young growth companies in Germany. We find empirical evidence that VCs were able to time their exit quite successfully in the primary market and to some extent also in the secondary market. The larger the number of shares being sold by the VCs at the IPO date, the lower is the IPO performance after expiration of the lock-up period. In addition, the firms that went public in the year 2000 planned their IPO too late in the stock market cycle so that--due to the mandatory lock-up period of six months--some VCs had no chance for a lucrative exit and still owned shares three years after the IPO. Thus, lock-up commitments can be quite costly for early investors particularly towards the end of a hot issue market.