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Financing Risk and Innovation

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  • Ramana Nanda

    (Harvard University, Boston, Massachusetts 02163)

  • Matthew Rhodes-Kropf

    (Harvard University, Boston, Massachusetts 02163)

Abstract

We provide a model of investment in 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. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value by creating a trade-off between protecting the firm from financing risk and maximizing its real option value. We propose that extremely novel technologies may need “hot” financial markets to get through the initial period of discovery or diffusion.

Suggested Citation

  • Ramana Nanda & Matthew Rhodes-Kropf, 2017. "Financing Risk and Innovation," Management Science, INFORMS, vol. 63(4), pages 901-918, April.
  • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:4:p:901-918
    DOI: 10.1287/mnsc.2015.2350
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