Events

Finance Seminar

Authors:

• Matthew Rhodes-Kropf
  Harvard Business School

• Ramana Nanda
  Harvard Business School

Paper 1: "Financing Risk and the Commercialization of Innovation" We demonstrate how the financing equilibrium faced by investors in new ventures may either facilitate or hinder the degree of experimentation they are willing to undertake. Since new ventures are central to the technological revolutions that drive the process of creative destruction, we show that the financial market equilibrium plays a fundamental role in driving the commercialization of new technologies in the economy. A key contribution of our paper is to show how some projects (those more experimental in nature) face equilibrium financing risk even in a financial market with unlimited capital and all rational equally informed participants. By endogenizing the investor response to projects with financing risk, we demonstrate that the most novel ventures in the economy cannot be protected from financing risk and may only be commercialized in `hot' markets, when financing risk is low.   Paper 2: "Investment Cycles and Startup Innovation"  We find that VC-backed firms receiving their initial investment in hot markets are less likely to IPO, but conditional on going public are valued higher on the day of their IPO, have more patents and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is true even for the most experienced VCs. Furthermore, our results suggest that the flood of capital in hot markets also plays a causal role in shifting investments to more novel startups – by lowering the cost of experimentation for early stage investors and allowing them to make riskier, more novel, investments.