Annals of Finance

, Volume 14, Issue 1, pp 1–47 | Cite as

Venture capital and underpricing: capacity constraints and early sales

  • Roberto PinheiroEmail author
Research Article


I present a model of the venture capital (VC) and public markets in which VCs suffer from capacity constraints, due to the shortage of skilled VC managers. Consequently, VC firms can only handle a limited number of new projects at once, having to divest from ongoing projects in order to take advantage of new opportunities. This framework is able to match key features presented by the VC and initial public offer (IPO) empirical literatures: (1) VC-backed firms are younger, smaller, and less profitable at the IPO than their non-VC backed counterparts; (2) VC-backed IPOs are more underpriced than non-VC backed ones, (3) there is a positive relationship between underpricing and VC fundraising; (4) small and young VC firms usually take portfolio firms public earlier than their large and mature counterparts; (5) in hot IPO markets, VCs are more likely to take public both very young and small firms as well as mature and large firms, compared to cold markets. Differently, non-VC backed firms are usually smaller and younger in hot markets than in cold ones.


IPO Venture capital Underpricing Capacity constraints 

JEL Classification

G24 G11 



I would like to thank Jan Eeckhout Ken Burdett, Guido Menzio, and Rafael Silveira for several discussions and encouragement during this project. I am also indebted to Andrew Postlewaite, Boyan Jovanovic, Randall Wright, Philipp Kircher, Manju Puri, Ludo Visschers, Chao Fu, Teddy Kim and the seminar participants at University of Alberta, University of Colorado, University of Pennsylvania, for helpful comments and discussions. I’m also deeply in debt with Elizabeth Mellon and Cezar Santos for research assistance.


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Copyright information

© Springer-Verlag GmbH Germany 2017

Authors and Affiliations

  1. 1.Federal Reserve Bank of ClevelandClevelandUSA

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