The United States has both an active venture capital industry and well‐developed stock markets. Japan and Germany have neither. The authors argue that this is no accident— that venture capital flourishes especially, and perhaps only, when venture capitalists can exit from successful portfolio companies through initial public offerings (IPOs), which in turn require an active stock market.Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers, particularly (1) the importance of exit by venture capitalists and (2) the implicit contract over control between venture capitalists and entrepreneurs created by the possibility of exit through an IPO. This possibility gives entrepreneurs a valuable option that, in the event they are successful, allows them to reacquire control of their enterprises from venture capitalists.