Early-stage financing and firm growth in new industries

Inderst, Roman; Müller, Holger M.

doi:10.1016/j.jfineco.2008.07.004

Cited by 51 publications

(26 citation statements)

References 30 publications

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“…7 Indeed-and this is the key contribution of this paper-we build a simple model of entrepreneurial finance where relatively risky ventures use VC financing while safer ventures use bank financing, and where the positive impact of competition on the appeal of bank financing relative to VC financing emerges as a robust result. 8 One exception in the prior literature, and one more closely related to this paper, is the recent work of Inderst and Mueller (2009), which offers a compelling analysis of the interaction between product market competition and the entrepreneur's choice between active investors (e.g., venture capitalists) and passive ones (e.g., banks). In their model, active investors may enable ventures to "'strategically overinvest' early on, thus forestalling their rivals' future investment and growth" (p. 276), a strategic advantage for active investors that becomes more valuable as competition intensifies.…”

Section: Introductionmentioning

confidence: 99%

Product Market Competition and the Financing of New Ventures

Bettignies

Duchêne

2015

Management Science

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T his paper examines the interaction between venture risk, product market competition, and the entrepreneur's choice between bank financing and venture capital (VC) financing. Under bank financing, a debt-type contract emerges as optimal, which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives, as long as the entrepreneur can service the debt repayment; however, this leads to liquidation in the case of default, making the venture's success quite sensitive to exogenous, even temporary, shocks that may hinder debt repayment. Under VC financing, an equity-type contract emerges as optimal. Although it is not sensitive to exogenous shocks, this contract requires the entrepreneur to share a fraction of the rents with the financier, thus yielding lower effort incentives for the entrepreneur. There exists a threshold level of venture risk such that bank financing is optimal if and only if venture risk is below that threshold. Product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to VC financing. This is a robust result that is shown to hold in various models of competition, including the Hotelling, Salop, Dixit-Stiglitz, and Cournot-to-Bertrand switch.

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Section: Introductionmentioning

confidence: 99%

Product Market Competition and the Financing of New Ventures

Bettignies

Duchêne

2015

Management Science

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“…At the same time, a vast literature in industrial organization and the economics of organizations has explored how firm boundaries are important for determining the success of new product market opportunities (see, e.g., Aghion and Tirole (1994), Anton and Yao (1995), Mathews and Robinson (2008), Robinson (2008), Inderst and Mueller (2009), and Fulghieri and Sevilir (2010)). 1 The goal of this paper is to examine how debt financing and investment distortions interact with the dynamics of new product market opportunities to determine the optimal placement of firm boundaries.…”

Section: Introductionmentioning

confidence: 99%

Capital Structure, Product Market Dynamics, and the Boundaries of the Firm

2014

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We study how interactions between financing and investment decisions can shape firm boundaries in dynamic product markets. In particular, we model a new product market opportunity as a growth option and ask whether it is best exploited by a large incumbent firm (Integration) or by a separate, specialized firm (Non-Integration). Starting from a standard theoretical framework, in which value-maximizing corporate investment and financing decisions are jointly determined, we show that Integration best protects assets in place value, while Non-Integration best protects the value of the growth option and maximizes financial flexibility. These forces drive different organizational equilibria depending on firm and product market characteristics. In particular, we show that increases in standard measures of cash flow risk predict exploitation of new opportunities by specialized firms, while increases in product market risk (i.e., the risk of preemption by competitors) predict exploitation by incumbents. We also show that alliances organized as licensing agreements or revenue sharing contracts sometimes better balance the different sources of value, and thus may dominate more traditional forms of organization. These key results arise from the dynamic interaction of the new opportunity's option-like features with realistic competitive forces. JEL Classification Numbers: G13, G31, G32, G33.

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“…Some researches (Hellmann and Puri, 2002 [50] ; Inderst and Mueller, 2009 [51] ) show that, as the most common way of exogenous equity financing, bringing in venture capital leads to more active development strategy, and venture capitalist can help entrepreneurial firms to explore new markets and develop new products. Therefore, we propose the following hypothesis:…”

Section: Research Hypotheses and Theoretical Model 221 Research Hypmentioning

confidence: 99%

The impact of financing motivation on development strategy orientation of entrepreneurial firms

Zheng

Yue-kai

Jin

2011

2011 International Conference on Management Science &Amp; Engineering 18th Annual Conference Proceedings

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Based on the theoretical analysis of the relationship among financing motivation, financing choice and development strategy orientation of entrepreneurial firms, this paper puts forward a proposition on the impact of financing motivation on development strategy orientation of entrepreneurial firms, which is then tested empirically using survey data from massive Chinese entrepreneurial firms. The research finds that wealth accumulation motivation and self-determination motivation are two main motivations that influence financing choice of entrepreneurial firms. Driven by the two main financing motivations, entrepreneurial firms primarily choose exogenous equity financing and exogenous debt financing. Financing choice affects development strategy orientation of entrepreneurial firms. Exogenous equity financing leads to entrepreneurial firms' active development strategy orientation while exogenous debt financing leads to their steady development strategy orientation.

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Early-stage financing and firm growth in new industries

Cited by 51 publications

References 30 publications

Product Market Competition and the Financing of New Ventures

Product Market Competition and the Financing of New Ventures

Capital Structure, Product Market Dynamics, and the Boundaries of the Firm

The impact of financing motivation on development strategy orientation of entrepreneurial firms

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