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Early-stage financing and firm growth in new industries

Listed author(s):
  • Inderst, Roman
  • Müller, Holger

This paper shows that active investors, such as venture capitalists, can affect the speed at which new ventures grow. In the absence of product market competition, new ventures financed by active investors grow faster initially, though in the long run those financed by passive investors are able to catch up. By contrast, in a competitive product market, new ventures financed by active investors may prey on rivals that are financed by passive investors by “strategically overinvesting” early on, resulting in long-run differences in investment, profits, and firm growth. The value of active investors is greater in highly competitive industries as well as in industries with learning curves, economies of scope, and network effects, as is typical for many “new economy” industries. For such industries, our model predicts that start-ups with access to venture capital may dominate their industry peers in the long run.

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File URL: https://www.econstor.eu/bitstream/10419/97760/1/IMFS_WP_30.pdf
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Paper provided by Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS) in its series IMFS Working Paper Series with number 30.

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Date of creation: 2009
Handle: RePEc:zbw:imfswp:30
Contact details of provider: Web page: http://www.imfs-frankfurt.de/en.html
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