Debt Financing of High-growth Startups
AbstractWe study the business model of venture debt firms, specialized institutions that provide loans to high-growth startups. Venture debt represents an apparent contradiction with traditional debt theory since startups have negative cash flows and lack tangible assets to secure the loan. Yet, we estimate that the U.S. venture debt industry provides at least one venture debt dollar for every seven venture capital dollars invested. We aim to provide the first empirical evidence on the determinants of the lending decision. Building on existing field interviews and case studies, we design a choice experiment of the lending decision and conduct experiments with 55 senior venture lenders. We find support for the hypothesis that backing by venture capital firms substitutes for startups’ cash flow. Furthermore, we illustrate the signaling effect of patents and their role as collateral to facilitate the lending decision.
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Bibliographic InfoPaper provided by DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies in its series DRUID Working Papers with number 11-04.
Date of creation: 2011
Date of revision:
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Web page: http://www.druid.dk/
Venture capital; startups; patents;
Find related papers by JEL classification:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-BAN-2011-11-07 (Banking)
- NEP-ENT-2011-11-07 (Entrepreneurship)
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