1. © Cumming & Johan (2013) Investment Duration Cumming & Johan (2013, Chapter 20) 1

2. © Cumming & Johan (2013) Investment Duration Chapter Objectives (1 of 2) Introduction/Theory Data Regressions Remarks Policy Investment Duration = Date of First Investment to Date of First Exit Specifically focus on VC investment duration for two main reasons. – First, VCs certify the quality of the company that goes public and thereby increases investor confidence that the company seeking public funding is of sound quality. This is particularly the case when the VC has been involved in the company for many years and does not appear to be after a quick exit to take advantage of the market (Megginson and Weiss, 1991). IPOs also tend to perform better where the VC commits not to sell all of their interest in the company after the expiration of the lock-up period (Gompers and Lerner, 1999). – Second... Next slide 2

3. © Cumming & Johan (2013) Investment Duration Chapter Objectives (2 of 2) Introduction/Theory Data Regressions Remarks Policy – Second, where the VC adds value to the investee, the VC professionalizes the company such that it has in place a system of operations and corporate governance mechanisms that make it an effective candidate to be a successful publicly listed company (Gompers and Lerner, 1999). VC- backed IPOs in the long-run out-perform non VC-backed IPOs (Brav and Gompers, 1997; Gompers and Lerner, 1999). Furthermore, it has been shown that the longer the duration of VC investment, the stronger the performance of the company that lists on a stock exchange (Megginson and Weiss, 1991). Theorize factors that affect venture capital investment duration in a straightforward model with the use of graphs. Analyze comparable venture capital investment duration datasets from Canada and the United States. 3

4. © Cumming & Johan (2013) Investment Duration Time to VC Exit Introduction/Theory Data Regressions Remarks Policy Exit when projected marginal costs (PMC) of maintaining the investment (including the opportunity costs) are greater than the projected marginal benefits (PMB) – First discussed in Cumming and MacIntosh (2001) 4

5. © Cumming & Johan (2013) Investment Duration PMC 0 PMVA 1 $ Time Figure 19.1 Time to Venture Capital Exit Exit 1 Exit 0 PMVA 0 Lower Quality VC: Reduce PMVA Reduce time to Exit Exit 2 Greater Capital for Investment Higher PMC Shorter time to Exit PMC 2 5

6. © Cumming & Johan (2013) Investment Duration FactorHyp #Effect on PMVAEffect on PMCImpact on VC Investment Duration Ent, Firm Characteristics Early Stage of DevelopmentH1High Ambiguous in general, but for non-write- off exits expect longer investment duration High-TechH1High Ambiguous in general, but for non-write- off exits expect longer investment duration Firm Age at First InvestmentH2LowNoneShorter Deal Characteristics SyndicationH3 Low for any given single investor (but higher across each investor) High where conflicts among syndicated VCs and simple coordination costs Shorter Deal SizeH4LowHighShorter Market Conditions Internet BubbleH5NoneHighShorter High MSCI ReturnsH5NoneHighShorter Capital for InvestmentH6LowHighShorter New Investment Opp.H7LowNoneShorter Investor Characteristics Canadian LSVCC Corporate VC H8 H9 Low None Shorter Table 20.1. Testable Hypotheses 6

7. © Cumming & Johan (2013) Investment Duration Data Introduction/Theory Data Regressions Remarks Policy 557 Canadian and 1,607 US VC-backed companies over the period 1991-2004. Canadian data source: Macdonald and Associates, Limited. US data source: Venture Economics, Inc. Canadian VCs achieved – 5.7% IPOs – 73.8% private exits (acquisitions, secondary sales and buybacks) – 20.5% write-offs US VCs achieved – 35.7% IPOs – 54.6% private exits – 9.7% write-offs Study possible for the first time thanks to the release of Canadian exits data 7

8. © Cumming & Johan (2013) Investment Duration 8

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13. © Cumming & Johan (2013) Investment Duration Figure 20.7. Number of VC-Backed IPOs in Canada and the US 0 20 40 60 80 100 120 140 19911992199319941995199619971998199920002001200220032004 Exit Year USCanada 13

14. © Cumming & Johan (2013) Investment Duration Empirical Analyses Introduction/Theory Data Regressions Remarks Policy Hazard models of time from first investment to exit 14

15. © Cumming & Johan (2013) Investment Duration Table 20.5 Panel A. Hypothesi s Number Model 1: Canada and USModel 2: Canada and USModel 3: Canada and USModel 4: Canada OnlyModel 5: US Only Coefficientt-statisticCoefficientt-statisticCoefficientt-statisticCoefficientt-statisticCoefficientt-statistic Early StageH10.0780.5760.0520.3860.0850.5921.2631.3910.1951.205 Expansion StageH10.3722.599***0.3512.442**0.5003.346***0.1650.1840.4772.888*** Life SciencesH10.0280.1960.0760.538 -0.256-0.364-0.003-0.023 Other High TechH10.0080.064-0.010-0.084 -0.323-0.4650.1871.452 Firm Age at First VC InvestmentH20.0451.5020.0481.5800.0050.1620.9783.187***-0.004-0.152 SyndicationH30.1271.1260.1621.431 Log (Deal Size)H40.2055.167***0.1914.869***0.1153.538***-0.006-0.0210.0982.800*** Bubble Dummy Variable at InvestmentH5-0.079-0.507-0.081-0.523 2.2272.349**0.4422.847*** Bubble Dummy Variable at ExitH5-0.050-0.4090.0020.017 2.4892.265**0.2852.270** Log (1+Stock Index Returns 3 Months Prior to Exit) H50.9183.027***0.8432.791***0.0720.235-1.001-0.278-0.210-0.624 Log(1+Stock Index Returns Over Investment Duration) H5-0.189-2.204***-0.199-2.314**-0.321-4.703***-9.010-3.814***-0.249-2.628*** Capital Available for InvestmentH60.94311.693***0.92211.481***0.3734.667***1.2270.6160.2653.042*** New Investment OpportunitiesH711.3327.574***11.8157.944*** 5.7200.5299.2665.382*** CanadaH81.1885.908*** 0.4172.181** Labour Sponsored Venture Capital Fund H8 1.1713.236*** 1.5382.065** Corporate Venture Capital FundH9 0.9912.299** 0.8101.103 Diagnostics Number of Observations1639 60532573 Number of IPOs605 32573 Loglikelihood-3730.153-3737.602-3230.448-49.983-3006.649 Pseudo R 2 0.0440.0420.0140.3870.021 15

16. © Cumming & Johan (2013) Investment Duration Economic Significance Introduction/Theory Data Regressions Remarks Policy Canadian VCs exit IPOs at least 51.7% faster than their US counterparts, and this effect is statistically significant at the 1% level. LSVCC-originated investments are exited 223% quicker than private independent limited partnerships (Model 2; the economic significance is 366% in Model 4) and this effect is statistically significant at the 1% level in both Models 2 and 4. 16

17. © Cumming & Johan (2013) Investment Duration Remarks Introduction/Theory Data Regressions Remarks Policy Time to IPO is shorter in Canada VCs have a smaller percentage of IPOs in Canada LSVCCs in Canada 17

18. © Cumming & Johan (2013) Investment Duration Table 120.6. Exit Frequency and Time To Venture Capital Exit: Comparisons Across Australasia, Canada, Europe and the United States IPOPrivate ExitsWrite-off Australasia (Cumming et al., 2006) 1989-2001 Average = 2.84 years (23% Exits) Average= 3.43 years (60% Exits) Average = 4.58 years (17% Exits) Canada (This Chapter) 1991-2004 Average = 2.45 years (5.85% Exits) Average = 4.11 years (74.22% Exits) Average = 3.18 years (19.93% Exits) Continental Europe (Cumming, 2013) 1995-2005 Average = 3.33 years (17.02% Exits) Average = 3.38 years (48.94% Exits) Average = 3.58 years (34.04% Exits) Europe (Schwienbacher, 2003) 1990 to 2001 Average=3.7 years for all exit types (25.3% Exits)(53.9% Exits)(20.8% Exits) United Kingdom (Nikoskelainen and Wright, 2007) 1995-2004 Average = 2.6 years (16.2% Exits) Average = 3.56 years (46.1% Exits) Average = 3.9 years (37.7% Exits) United States (This Chapter) 1991-2004 Average = 2.95 years (35.65% Exits) Average = 3.16 years (54.64% Exits) Average = 2.88 years (9.71% Exits) United States (Giot and Schwienbacher, 2007) 1980-2003 Average = 3.34 years (16% Exits) Average = 4.56 years (49.8% Exits) Average = 3.30 years (32.8% Exits) 18

19. © Cumming & Johan (2013) Investment Duration Policy Implications Introduction/Theory Data Regressions Remarks Policy Reduce role of Government sponsored LSVCCs in Canada After [pre-IPO] VC markets are “fixed”, could consider raising IPO listing standards in Canada 19