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Financing Risk and Innovation

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  • Ramana Nanda

    ()
    (Harvard Business School, Entrepreneurial Management Unit)

  • Matthew Rhodes-Kropf

    ()
    (Harvard Business School, Entrepreneurial Management Unit)

Abstract

We provide a model of investment into new ventures that demonstrates why some places, times and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk ? a forecast of limited future funding ? by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need `hot' financial markets to get through the initial period of discovery or diffusion.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 11-013.

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Length: 44 pages
Date of creation: Aug 2010
Date of revision: Jan 2014
Handle: RePEc:hbs:wpaper:11-013

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  1. Bergemann, D. & Hege, U., 2001. "The Financing of Innovation: Learning and Stopping," Discussion Paper 2001-16, Tilburg University, Center for Economic Research.
  2. Steven Kaplan & Antoinette Schoar, 2003. "Private Equity Performance: Returns, Persistence and Capital," NBER Working Papers 9807, National Bureau of Economic Research, Inc.
  3. Dirk Bergemann & Ulrich Hege & Liang Peng, 2008. "Venture Capital and Sequential Investments," Cowles Foundation Discussion Papers 1682, Cowles Foundation for Research in Economics, Yale University, revised Nov 2008.
  4. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," NBER Working Papers 11555, National Bureau of Economic Research, Inc.
  5. Gompers, Paul & Kovner, Anna & Lerner, Josh & Scharfstein, David, 2008. "Venture capital investment cycles: The impact of public markets," Journal of Financial Economics, Elsevier, vol. 87(1), pages 1-23, January.
  6. Carlsson, H. & Damme, E.E.C. van, 1993. "Global games and equilibrium selection," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154416, Tilburg University.
  7. Bart Hobijn & Boyan Jovanovic, 2000. "The Information Technology Revolution and the Stock Market: Evidence," NBER Working Papers 7684, National Bureau of Economic Research, Inc.
  8. Lubos Pastor & Pietro Veronesi, 2005. "Technological Revolutions and Stock Prices," NBER Working Papers 11876, National Bureau of Economic Research, Inc.
  9. Sampsa Samila & Olav Sorenson, 2011. "Venture Capital, Entrepreneurship, and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 338-349, February.
  10. Ramana Nanda, 2008. "Cost of External Finance and Selection into Entrepreneurship," Harvard Business School Working Papers 08-047, Harvard Business School.
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Citations

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Cited by:
  1. 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.
  2. He, Jie (Jack) & Tian, Xuan, 2013. "The dark side of analyst coverage: The case of innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 856-878.
  3. William Kerr & Ramana Nanda, 2009. "Financing Constraints and Entrepreneurship," NBER Working Papers 15498, National Bureau of Economic Research, Inc.

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