Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-25T08:18:33.513Z Has data issue: false hasContentIssue false
  • English
  • Français

When and Why Do Venture-Capital-Backed Companies Obtain Venture Lending?

Published online by Cambridge University Press:  15 June 2017

Tereza Tykvová
Get access Rights & Permissions [Opens in a new window]

Abstract

I model the decision of an informed early-stage venture capital (VC) investor that considers involving an uninformed VC or venture lending (VL) investor to finance the late stage. Early-stage VC investors that own high-quality value companies tend to signal their quality and they frequently turn to VL investors. Early-stage VC investors prefer VC if the proportion of high-quality companies in the population is high, if their companies have a high upside potential, if they can benefit from the value that late-stage VC investors add, or if uncertainty is high. I find empirical evidence consistent with these predictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 3 , June 2017 , pp. 1049 - 1080
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

I am thankful to Douglas Cumming (the referee), Paul Malatesta (the editor), and the participants of the 2015 Financial Management Association European conference and the 2014 Paris Financial Management conference for their comments. I gratefully acknowledge access to Dow Jones Venture Source, Bureau van Dijk Orbis, Standard & Poor’s Capital IQ, Thomson ONE, and Datastream provided by DALAHO, University of Hohenheim. I thank Tim Pollock for providing me with the data on VC reputation. Julia Stefanchuk and Urs Schopp-Leypoldt provided invaluable assistance during the data-collection phase. All errors are my own.

References

Admati, A. R., and Pfleiderer, P.. “Robust Financial Contracting and the Role of Venture Capitalists.” Journal of Finance, 49 (1994), 371–402.CrossRefGoogle Scholar
Amornsiripanitch, N.; Gompers, P. A.; and Xuan, Y.. “More Than Money: Venture Capitalists on Boards.” Available at http://dx.doi.org/10.2139/ssrn.2586592 (2016).Google Scholar
Barry, C. B.“New Directions in Research on Venture Capital Finance.” Financial Management, 23 (1994), 3–15.CrossRefGoogle Scholar
Bergemann, D., and Hege, U.. “Venture Capital Finance, Moral Hazard, and Learning.” Journal of Banking and Finance, 22 (1998), 703–735.Google Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T.. “Who Are the Active Investors? Evidence from Venture Capital.” Journal of Financial Economics, 89 (2008), 488–512.CrossRefGoogle Scholar
Brander, J. A.; Amit, R.; and Antweiler, W.. “Venture Capital Syndication: Improved Venture Selection versus Value-Added Hypothesis.” Journal of Economics and Management Strategy, 11 (2002), 423–452.Google Scholar
Brav, O.“Access to Capital, Capital Structure, and the Funding of the Firm.” Journal of Finance, 64 (2009), 263–308.Google Scholar
British Private Equity and Venture Capital Association. The Rise of Venture Debt in Europe. London, UK: British Private Equity and Venture Capital Association(2010).Google Scholar
Casamatta, C.“Financing and Advising: Optimal Financial Contracts with Venture Capitalists.” Journal of Finance, 58 (2003), 2059–2086.Google Scholar
Cho, I.-K., and Kreps, D. M.. “Signaling Games and Stable Equilibria.” Quarterly Journal of Economics, 102 (1987), 179–221.Google Scholar
Cosh, A.; Cumming, D. J.; and Hughes, C.. “Outside Enterpreneurial Capital.” Economic Journal, 119 (2009), 1494–1533.Google Scholar
Cox, D. R.“Regression Models and Life-Tables.” Journal of the Royal Statistical Society, Series B, 34 (1972), 187–220.Google Scholar
Crawford, D. Smartcard Systems, Inc. Darden Case UVA-F-1405. Charlottesville, VA: Darden Business Publishing (2003).Google Scholar
Cumming, D. J.“Capital Structure in Venture Finance.” Journal of Corporate Finance, 11 (2005), 550–585.Google Scholar
Cumming, D. J.“Adverse Selection and Capital Structure: Evidence from Venture Capital.” Entrepreneurship Theory and Practice, 30 (2006), 155–184.Google Scholar
Cumming, D. J.“Contracts and Exits in Venture Capital Finance.” Review of Financial Studies, 21 (2008), 1947–1982.Google Scholar
Cumming, D. J., and Dai, N.. “Local Bias in Venture Capital Investments.” Journal of Empirical Finance, 17 (2010), 362–380.Google Scholar
Cumming, D. J., and Dai, N.. “Fund Size, Limited Attention and Valuation of Venture Capital Backed Firms.” Journal of Empirical Finance, 18 (2011), 2–15.Google Scholar
Cumming, D. J.; Haslem, B.; and Knill, A.. “Entrepreneurial Litigation and Venture Capital Finance.” Journal of Financial and Quantitative Analysis, forthcoming (2017).Google Scholar
Cumming, D. J., and Johan, S.. “Information Asymmetries, Agency Costs and Venture Capital Exit Outcomes.” Venture Capital: An International Journal of Entrepreneurial Finance, 10 (2008a), 197–231.Google Scholar
Cumming, D. J., and Johan, S.. “Preplanned Exit Strategies in Venture Capital.” European Economic Review, 52 (2008b), 1209–1241.Google Scholar
Cumming, D. J., and Johan, S.. “Venture Capital Investment Duration.” Journal of Small Business Management, 48 (2010), 228–257.Google Scholar
De Bettignies, J. E., and Brander, J. A.. “Financing Entrepreneurship: Bank Finance versus Venture Capital.” Journal of Business Venturing, 22 (2007), 808–832.Google Scholar
Fine, J., and Gray, R.. “A Proportional Hazards Model for the Subdistribution of a Competing Risk.” Journal of the American Statistical Association, 94 (1999), 496–509.Google Scholar
Fischer, T., and de Rassenfosse, G.. “Venture Debt Financing: Determinants of the Lending Decision.” Available at http://dx.doi.org/10.2139/ssrn.1909602 (2013).CrossRefGoogle Scholar
Fluck, Z.; Garrison, K.; and Myers, S.. “Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance.” Working Paper No. 11624, National Bureau of Economic Research (2005).Google Scholar
Gordan, P.“Venture Debt: A Capital Idea for Startups.” Kauffman Fellows Report, 4 (2012).Google Scholar
Hall, R. E., and Woodward, S. E.. “The Burden of the Nondiversifiable Risk of Entrepreneurship.” American Economic Review, 100 (2010), 1163–1194.Google Scholar
Hardymon, G. F., and Leamon, A.. Silicon Valley Bank. HBS Case 9-800-332. Boston, MA: Harvard Business School Publishing (2001).Google Scholar
Hardymon, G. F.; Lerner, J.; and Leamon, A.. Gold Hill Venture Lending. HBS Case 804–083. Boston, MA: Harvard Business School Publishing (2005).Google Scholar
Harris, M., and Raviv, A.. “Capital Structure and the Informational Role of Debt.” Journal of Finance, 45 (1990), 321–349.Google Scholar
Harris, M., and Raviv, A.. “The Theory of Capital Structure.” Journal of Finance, 46 (1991), 297–355.CrossRefGoogle Scholar
Hartmann-Wendels, T.; Keienburg, G.; and Sievers, S.. “Adverse Selection, Investor Experience and Security Choice in Venture Capital Finance: Evidence from Germany.” European Financial Management, 17 (2011), 464–499.Google Scholar
Hellmann, T., and Puri, M.. “Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence.” Journal of Finance, 57 (2002), 169–197.Google Scholar
Hochberg, Y.; Ljungqvist, A.; and Lu, Y.. “Whom You Know Matters: Venture Capital Networks and Investment Performance.” Journal of Finance, 62 (2007), 251–301.Google Scholar
Ibrahim, D. M.“Debt as Venture Capital.” University of Illinois Law Review, 2010 (2010), 1169–1210.Google Scholar
Jensen, M. C.“Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.Google Scholar
Kaplan, S. N., and Strömberg, P.. “Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts.” Review of Economic Studies, 70 (2003), 281–315.Google Scholar
Lee, P. M.; Pollock, T. G.; and Jin, K.. “The Contingent Value of Venture Capitalist Reputation for Entrepreneurial Firms.” Strategic Organization, 9 (2011), 33–69.CrossRefGoogle Scholar
Lemmon, M. L., and Zender, J. F.. “Debt Capacity and Tests of Capital Structure Theories.” Journal of Financial and Quantitative Analysis, 45 (2010), 1161–1187.Google Scholar
Manigart, S.; Lockett, A.; Meuleman, M.; Wright, M.; Landstroem, H.; Bruining, H.; Desbrieres, P.; and Hommel, U.. “Venture Capitalists’ Decision to Syndicate.” Entrepreneurship Theory and Practice, 30 (2006), 131–153.Google Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.Google Scholar
Nahata, R.; Hazarika, S.; and Tandon, K.. “Success in Global Venture Capital Investing: Do Institutional and Cultural Differences Matter?” Journal of Financial and Quantitative Analysis, 49 (2014), 1039–1070.Google Scholar
National Venture Capital Association. 2014 NVCA Yearbook. Washington, DC: National Venture Capital Association(2010).Google Scholar
Rajan, R., and Zingales, L.. “What Do We Know about Capital Structure? Some Evidence from International Data.” Journal of Finance, 50 (1995), 1421–1460.Google Scholar
Robb, A. M., and Robinson, D. T.. “The Capital Structure Decisions of New Firms.” Review of Financial Studies, 27 (2014), 153–179.CrossRefGoogle Scholar
Roberts, M.; Sahlman, W. A.; and Kind, L.. Pinnacle Ventures. HBS Case 9-808-048. Boston, MA: Harvard Business School Publishing (2008).Google Scholar
Sahlman, W. A.“The Structure and Governance of Venture-Capital Organizations.” Journal of Financial Economics, 27 (1990), 473–521.CrossRefGoogle Scholar
Schmidt, K. M.“Convertible Securities and Venture Capital Finance.” Journal of Finance, 58 (2003), 1139–1166.Google Scholar
Schwienbacher, A.“The Entrepreneur’s Investor Choice: The Impact on Later-Stage Firm Development.” Journal of Business Venturing, 28 (2013), 528–545.CrossRefGoogle Scholar
Stulz, R.“Managerial Discretion and Optimal Financing Policies.” Journal of Financial Economics, 26 (1990), 3–27.Google Scholar
Vincenty, T.“Direct and Inverse Solutions of Geodesics on the Ellipsoid with Application of Nested Equations.” Survey Review, 23 (1975), 88–93.CrossRefGoogle Scholar
Winton, A., and Yerramilli, V.. “Entrepreneurial Finance: Banks versus Venture Capital.” Journal of Financial Economics, 88 (2008), 51–79.Google Scholar