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Does Security Choice Matter in Venture Capital? The Case of Venture Debt

Listed author(s):
  • Indraneel Chakraborty
  • Michael Ewens

The switch from equity to debt in venture capital-backed entrepreneurial firms is rare, but uniquely informative. Using a novel dataset of financing decisions, we find that entrepreneurial firms that raise debt financing suffer from an average 40% post-debt valuation drop and a 26% lower probability of successful exit (IPO/acquisition). Venture capitalists with equity stakes lend to lower quality entrepreneurial firms compared to outside lenders, and debt from both precedes deterioration in firm quality. Our results do not imply that debt causes negative outcomes. Rather, we argue that debt helps maintain incentive alignment after adverse shocks to firm quality.

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File URL: http://ewens.tepper.cmu.edu/papers/vc_debtFinal.pdf
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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2012-E35.

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Handle: RePEc:cmu:gsiawp:950544537
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Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890

Web page: http://www.tepper.cmu.edu/

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