Can Venture Capitalists in Biotechnology Time the Market?

Abstract

This paper investigates the ability of venture capitalists to time market conditions when deciding between public and private financings as well as issuance of follow-on offerings, focusing on a segment of the U.S. biotechnology industry. This has been assessed by studying the timing of public vs. private financings measured against market conditions during and around the time of financings. We find evidence of pseudo market-timing, meaning that the decision of venture capitalists to take a company public is a response to market sector run-ups, not because future market returns are predictable. Further, when examining financing events post-IPO, our findings show that there is significant correlation between firm specific returns and market sector run-ups, and the prospect of issuing new equity within one and two years post-IPO. Taking the perspective of IPOs and follow-on offerings as facilitating mechanisms for venture capitalists in the process of exiting their equity positions and realising returns on investment, it appears that venture capitalists operating in the biotechnology industry, can time the market.