Why do(n't) VCs go public? An analysis of funding decisions in the German venture capital industry

Venture capital firms generally develop young companies to a stage where they can either sell the company in a trade sale, or take the company public and achieve the exit through an IPO. Given that the latter alternative seems to be the preferable alternative to earn money, the question arises why venture capital firms themselves tend to be organized as private companies that are not listed on a stock exchange. This is in any case true for the U.S. where legal constraints make such an option impossible. A public listing of a VC company is only possible in the form of a Small Business Investment Company (SBIC); in this case, however, the required standards and operating procedures for an SBIC are differing from those of a limited partnership VC such that a SBIC has simply to be classified as a different business model. In contrast, in Japan and Germany, where the legal constraints are less restrictive, there are no a priori reasons why an IPO should not be a viable option for a VC company. And indeed, in Japan - where the venture capital industry is still in its infancies, due to an underdeveloped start-up scenery - we currently find five VCs that are publicly listed. In Germany nine venture capital companies went public during the Internet boom in the late 1990s. However, all of those VC companies, except for one, had quit business, de-listed or changed the business model by spring 2003. Our research aims at finding out the reasons for this, and why venture capital firms do not seem to be suitable for public financing. The relevance of our research question is supported by the fact that, in the 1990s and the early 2000s, the issue of going public became also hotly debated in other industries where companies are traditionally organized as private partnerships. One example is the management consulting industry where at least Accenture took the final step and got listed at the New York stock exchange in July 2001. Another example is the investment banking industry where all major players changed their business model, with Goldman Sachs as a late follower who made the IPO decision after discussions within the company for more than 30 years. From this perspective, the private partnership model of venture capital firms should not be taken for granted: The possibility of an IPO of those firms deserves a theoretical discussion, and the experiences which, e.g., the German VC companies made in this regard should be carefully evaluated.