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The Leveraging of Silicon Valley

Author

Listed:
  • Jesse Davis
  • Adair Morse
  • Xinxin Wang

Abstract

Early-stage firms utilize venture debt in one-third of financing rounds despite their general lack of cash flow and collateral. In our model, we show how venture debt aligns incentives within a firm. We derive a novel theoretical channel in which runway extension through debt increases firm value while potentially lowering closure. Consistent with the model's mechanism, we find that dilution predicts venture debt issuance. Empirically, treatment with venture debt lowers closure hazard by 1.6-4.4% and increases successful exits by 4.3-5.3%. Back-of-the-envelope calculations suggest $41B, or 9.4% of invested capital, remains productive due to venture debt.

Suggested Citation

  • Jesse Davis & Adair Morse & Xinxin Wang, 2020. "The Leveraging of Silicon Valley," NBER Working Papers 27591, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27591
    Note: CF PR
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    References listed on IDEAS

    as
    1. Darwin V. Neher, 1999. "Staged Financing: An Agency Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 255-274.
    2. Bengtsson, Ola & Sensoy, Berk A., 2011. "Investor abilities and financial contracting: Evidence from venture capital," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 477-502, October.
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    Cited by:

    1. Jan Starmans, 2023. "Technological Determinants of Financial Constraints," Management Science, INFORMS, vol. 69(5), pages 3003-3024, May.
    2. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.

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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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