b

This study offers evidence on how the form of exit, via an M&A or IPO exit, matters in venture capital. In particular, we focus on the role of the form of exit in resolving information asymmetries related to venture capitalists ’ (VCs’) skill and reputation-building. Using a sample of returns from 1,222 M&A and 1,436 IPO exits from U.S. based venture-backed companies over 1985 to 2008, we find that the returns to M&A and IPO exits are systematically different, but the form of exit itself is not a perfect indicator of exit quality. IPO exit returns are substantially more persistent than prior M&A returns, consistent with having a closer link to VCs’ skills. Additionally, IPOs are more valuable to VCs than M&A exits for reputation building, as measured by the likelihood of future fund-raising by the VC. While top quartile M&A returns are seemingly harder to achieve for VCs than top quartile IPO returns, they have lower reputational value than IPOs. IPO exits carry a large ―reputation premium ‖ over M&A exits which cannot be explained by the higher levels of returns. In the context of the VCs ’ increasing difficulty in achieving IPO exits and the predominance of M&A exits in the last decade, our findings have implications for capital recovery, skill-related signaling value of exits, and reputation buildin