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Venture Capital and Sequential Investments

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  • Dirk Bergemann
  • Ulrich Hege
  • Liang Peng

Abstract

We analyze sequential investment decisions in an innovative project that depend on the investor's information about the project failure risk and its potential final value. We consider the feedback effects between learning about the project parameters and the continuous adjustment of the investment strategy. Investors decide sequentially about the speed of investment and the optimal degree of involvement. We develop three types of predictions from our theoretical model and test these predictions in a large sample of venture capital investment in the U.S. for the period of 1987-2002. First, the investment flow starts cautiously if the failure risk is high and accelerates as the projects mature. Second, the investment flow reacts positively to information that arrives while the project is developed. We find that interim information is more significant for investment decisions than the information prior to the project launch. Third, investors distribute their investments over more funding rounds if the failure risk is larger.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 814577000000000046.

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Date of creation: 15 Jan 2009
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Handle: RePEc:cla:levarc:814577000000000046

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  1. PETER M. DeMARZO & YULIY SANNIKOV, 2006. "Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model," Journal of Finance, American Finance Association, American Finance Association, vol. 61(6), pages 2681-2724, December.
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  14. Steven N. Kaplan & Per Strömberg, 2000. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," CRSP working papers 513, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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Cited by:
  1. Dahiya, Sandeep & Ray, Korok, 2012. "Staged investments in entrepreneurial financing," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(5), pages 1193-1216.
  2. Da Rin, M. & Hellmann, T. & Puri, M.L., 2011. "A Survey of Venture Capital Research," Discussion Paper, Tilburg University, Center for Economic Research 2011-111, Tilburg University, Center for Economic Research.
  3. Ramana Nanda & Matthew Rhodes-Kropf, 2013. "Innovation and the Financial Guillotine," NBER Working Papers 19379, National Bureau of Economic Research, Inc.
  4. William R. Kerr & Ramana Nanda & Matthew Rhodes-Kropf, 2014. "Entrepreneurship as Experimentation," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 25-48, Summer.
  5. Johannes Horner & Larry Samuelson, 2009. "Incentives for Experimenting Agents," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1726, Cowles Foundation for Research in Economics, Yale University.
  6. Johannes Horner & Larry Samuelson, 2012. "Incentives for Experimenting Agents," Levine's Working Paper Archive 786969000000000418, David K. Levine.
  7. Johannes Horner & Larry Samuelson, 2009. "Incentives for Experimenting Agents," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1726RRR, Cowles Foundation for Research in Economics, Yale University, revised Jun 2013.
  8. Ramana Nanda & Ken Younge & Lee Fleming, 2014. "Innovation and Entrepreneurship in Renewable Energy," NBER Chapters, in: The Changing Frontier: Rethinking Science and Innovation Policy National Bureau of Economic Research, Inc.
  9. Johannes Horner & Larry Samuelson, 2009. "Incentives for Experimenting Agents," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1726R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2012.
  10. Ramana Nanda & Matthew Rhodes-Kropf, 2010. "Financing Risk and Innovation," Harvard Business School Working Papers 11-013, Harvard Business School, revised Jan 2014.

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