Department of Finance
Guanghua School of Management
Institutional Affiliation: University of Pennsylvania
NBER Working Papers and Publications
|July 2018||Financing Ventures|
with Jeremy Greenwood, Juan M. Sanchez: w24808
The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital: viz., statistics for each round of funding that concern the success rates, failure rates, investment rates, equity shares, and IPO values. Counterfactual experiments suggest that long-term U.S. growth would drop from 1.8 percent to 1.4-1.5 percent if venture capital were replaced by more traditional methods of finance. Likewise, it would drop fr...