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Financing Risk and Innovation

Author

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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.

Suggested Citation

  • Ramana Nanda & Matthew Rhodes-Kropf, 2010. "Financing Risk and Innovation," Harvard Business School Working Papers 11-013, Harvard Business School, revised Jan 2014.
  • Handle: RePEc:hbs:wpaper:11-013
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    File URL: http://www.hbs.edu/faculty/pages/download.aspx?name=11-013.pdf
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    References listed on IDEAS

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    1. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
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    6. Ramana Nanda, 2008. "Cost of External Finance and Selection into Entrepreneurship," Harvard Business School Working Papers 08-047, Harvard Business School.
    7. 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.
    8. Dirk Bergemann & Ulrich Hege & Liang Peng, 2008. "Venture Capital and Sequential Investments," Cowles Foundation Discussion Papers 1682R2, Cowles Foundation for Research in Economics, Yale University, revised Oct 2009.
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    Cited by:

    1. repec:eee:finana:v:53:y:2017:i:c:p:37-47 is not listed on IDEAS
    2. William R. Kerr & Ramana Nanda, 2009. "Financing Constraints and Entrepreneurship," Harvard Business School Working Papers 10-013, Harvard Business School.
    3. Giacinto Micucci & Paola Rossi, 2017. "Financing R&D investments: an analysis on Italian manufacturing firms and their lending banks," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 44(1), pages 23-49, March.
    4. 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.
    5. Rosemarie Ziedonis & Carlos Serrano & Yael Hochberg, 2015. "Patent collateral, investor commitment, and the market for venture lending," 2015 Meeting Papers 1170, Society for Economic Dynamics.
    6. Ramana Nanda & Ken Younge & Lee Fleming, 2014. "Innovation and Entrepreneurship in Renewable Energy," NBER Chapters,in: The Changing Frontier: Rethinking Science and Innovation Policy, pages 199-232 National Bureau of Economic Research, Inc.
    7. Jorge Guzman & Scott Stern, 2016. "Nowcasting and Placecasting Entrepreneurial Quality and Performance," NBER Chapters,in: Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, pages 63-109 National Bureau of Economic Research, Inc.
    8. Paolo Finaldi Russo & Silvia Magri & Cristiana Rampazzi, 2016. "Innovative start-ups in Italy: their special features and the effects of the 2012 law," Questioni di Economia e Finanza (Occasional Papers) 339, Bank of Italy, Economic Research and International Relations Area.
    9. 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.
    10. Giovanni Dosi & Valérie Revest & Alessandro Sapio, 2016. "Financial regimes, financialization patterns and industrial performances : preliminary remarks," Post-Print halshs-01418040, HAL.
    11. repec:spr:fininn:v:3:y:2017:i:1:d:10.1186_s40854-017-0070-0 is not listed on IDEAS
    12. Hottenrott, Hanna & Demeulemeester, Sarah, 2017. "R&D Subsidies and Firms’ Cost of Debt," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168093, Verein für Socialpolitik / German Economic Association.
    13. Yael V. Hochberg & Carlos J. Serrano & Rosemarie H. Ziedonis, 2014. "Patent Collateral, Investor Commitment, and the Market for Venture Lending," NBER Working Papers 20587, National Bureau of Economic Research, Inc.
    14. Michel Dumont, 2015. "Working Paper 05-15 - Evaluation of federal tax incentives for private R&D in Belgium: An update," Working Papers 1505, Federal Planning Bureau, Belgium.
    15. Demeulemeester, Sarah & Hottenrott, Hanna, 2015. "R&D subsidies and firms' cost of debt," DICE Discussion Papers 201, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    16. Jorge Guzman & Scott Stern, 2015. "Nowcasting and Placecasting Entrepreneurial Quality and Performance," NBER Working Papers 20954, National Bureau of Economic Research, Inc.
    17. Yael V. Hochberg & Carlos J. Serrano & Rosemarie H. Ziedonis, 2014. "Patent collateral investor commitment and the market for venture lending," Economics Working Papers 1448, Department of Economics and Business, Universitat Pompeu Fabra.
    18. Yael V. Hochberg & Carlos Serrano & Rosemarie H. Ziedonis, 2014. "Patent Collateral, Investor Commitment, and the Market for Venture Lending," Working Papers 792, Barcelona Graduate School of Economics.
    19. Yael V. Hochberg & Carlos J. Serrano & Rosemarie H. Ziedonis, 2015. "Patent collateral, investor commitment and the market for venture lending," Working Papers 1519, Banco de España;Working Papers Homepage.

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