NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Leveraging of Silicon Valley

Jesse Davis, Adair Morse, Xinxin Wang

NBER Working Paper No. 27591
Issued in July 2020
NBER Program(s):Corporate Finance, Productivity, Innovation, and Entrepreneurship

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.

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Document Object Identifier (DOI): 10.3386/w27591

 
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