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Staged Financing: An Agency Perspective

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Author Info
Neher, Darwin V
Abstract

This paper investigates the structure of outside investment in a profitable entrepreneurial venture. Though efficient, financing the venture up front may be infeasible because the entrepreneur cannot commit to not renegotiate down the outside investor's claim once she's sunk her investment. Staging the investment over time helps to mitigate this commitment problem. The early rounds of investment create collateral that support the later rounds. The author characterizes the optimal staged investment path and shows how it is affected by various features of the venture. The predictions of the model are consistent with observations on staged financing in venture capital. Copyright 1999 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 66 (1999)
Issue (Month): 2 (April)
Pages: 255-74
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Handle: RePEc:bla:restud:v:66:y:1999:i:2:p:255-74

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  1. Wait, A., 2001. "Delays in Bargaining With Incompelete Contracts," Department of Economics - Working Papers Series 809, The University of Melbourne. [Downloadable!]
  2. Christian Keuschnigg, 2003. "Optimal Public Policy For Venture Capital Backed Innovation," University of St. Gallen Department of Economics working paper series 2003 2003-09, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  3. Bienz, Carsten & Walz, Uwe, 2007. "Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis," Discussion Papers 2007/13, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  4. Smirnov, V. & Wait, A., 2001. "Timing of Investments, Hold-up and Total Welfare," Department of Economics - Working Papers Series 808, The University of Melbourne. [Downloadable!]
  5. Christian Keuschnigg, 2003. "Public Policy and Venture Capital Backed Innovation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  6. Andrea Schertler, 2000. "Venture Capital Contracts: A survey of the recent literature," Kiel Working Papers 1017, Kiel Institute for the World Economy. [Downloadable!]
  7. Zsuzsanna Fluck & Kedran Garrison & Stewart C. Myers, 2005. "Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance," NBER Working Papers 11624, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  9. Jiahua Che, 2000. "Decentralized Financing, Centralized Financing and the Dual Track System: Toward a New Theory of Soft Budget Constraints," William Davidson Institute Working Papers Series 261, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  10. Georg Gebhardt, 2006. "A Soft Budget Constraint Explanation for the Venture Capital Cycle," Discussion Papers 173, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  11. Dominik Egli & Steven Ongena & David C. Smith, 2002. "On the sequencing of projects, reputation building, and relationship finance," International Finance Discussion Papers 718, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Tracy R. Lewis & David E. M. Sappington, 2000. "Motivating Wealth-Constrained Actors," American Economic Review, American Economic Association, vol. 90(4), pages 944-960, September. [Downloadable!] (restricted)
  13. Jochen Bigus, . "Staging of Venture Financing, Investor Opportunism, and Patent Law," American Law & Economics Association Annual Meetings 1035, American Law & Economics Association. [Downloadable!]
  14. Vladimir Smirnov & Andrew Wait, 2007. "Staged Financing with a Variable Return," Contributions to Theoretical Economics, Berkeley Electronic Press, vol. 7(1), pages 1234-1234. [Downloadable!] (restricted)
  15. Smirnov, V. & Wait, A., 2001. "Hold-up and Sequential Specific Investments," Department of Economics - Working Papers Series 807, The University of Melbourne. [Downloadable!]
  16. Carsten Bienz & Julia Hirsch, 2006. "The Dynamics of Venture Capital Contracts," CFS Working Paper Series 2006/11, Center for Financial Studies. [Downloadable!]
    Other versions:
  17. Schertler, Andrea, 2001. "Venture Capital in Europe's Common Market: A Quantitative Description," EIFC - Technology and Finance Working Papers 4, United Nations University, Institute for New Technologies. [Downloadable!]
    Other versions:
  18. David R. Skeie, 2007. "Vesting and control in venture capital contracts," Staff Reports 297, Federal Reserve Bank of New York. [Downloadable!]
  19. Ekaterina Goldfain & Eugen Kovac, 2005. "Financing of Competing Projects with Venture Capital," Bonn Econ Discussion Papers bgse37_2005, University of Bonn, Germany. [Downloadable!]
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