Early-stage financing and firm growth in new industries

  • This paper shows that active investors, such as venture capitalists, can affect the speed at which new ventures grow. In the absence of product market competition, new ventures financed by active investors grow faster initially, though in the long run those financed by passive investors are able to catch up. By contrast, in a competitive product market, new ventures financed by active investors may prey on rivals that are financed by passive investors by “strategically overinvesting” early on, resulting in long-run differences in investment, profits, and firm growth. The value of active investors is greater in highly competitive industries as well as in industries with learning curves, economies of scope, and network effects, as is typical for many “new economy” industries. For such industries, our model predicts that start-ups with access to venture capital may dominate their industry peers in the long run. JEL Classifications: G24; G32 Keywords: Venture capital; dynamic investment; product market competition

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Author:Roman InderstORCiDGND, Holger M. MüllerGND
Parent Title (German):Working paper series / Institute for Monetary and Financial Stability ; 30
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (30)
Document Type:Working Paper
Year of Completion:2009
Year of first Publication:2009
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2009/12/08
Tag:dynamic investment; product market competition; venture capital
GND Keyword:Unternehmensgründung; Innovation; Risikokapital; Finanzierung
Published in: Journal of Financial Economics, 2009, vol. 93, issue 2, pp. 276-291
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht