Found 10 article(s) for author 'Matthew Rhodes-Kropf'

Coordination Frictions in Venture Capital Syndicates

Coordination Frictions in Venture Capital Syndicates. Ramana Nanda, Matthew Rhodes-Kropf, April 11, 2017, Paper, “An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a startup typically does not have just one investor, but several VCs that come together in a syndicate to finance a venture. In this chapter, we therefore argue for an expansion of the standard perspective to also include frictions within VC syndicates.Link

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Financing Risk and Innovation

Financing Risk and Innovation. Ramana Nanda, Matthew Rhodes-Kropf, March 2016, Paper, “We provide a model of investment in new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk, a forecast of limited future funding, by modifying their focus to finance less innovative firms. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value by creating a trade-off between protecting the firm from financing risk and maximizing its real option value. We propose that extremely novel technologies may need ‘hot’ financial markets to get through the initial period of discovery or diffusion. This paper was accepted by Gustavo Manso, finance.Link

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Regional Variation in Venture Capital: Causes and Consequences

Regional Variation in Venture Capital: Causes and Consequences. Ramana Nanda, Matthew Rhodes-Kropf, March 22, 2016, Book Chapter. “Entrepreneurship is a central element of the Schumpeterian process of creative destruction (Schumpeter, 1942). Startups have been associated with the birth of important new industries such as semiconductors and computers, the internet and biotechnology, and there is increasing evidence of the important role that startup firms play in driving aggregate productivity growth in the economy (Aghion and Howitt, 1992; King and Levine, 1993; Foster et al., 2008).Link

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Inside Rounds and Venture Capital Returns

Inside Rounds and Venture Capital Returns. Matthew Rhodes-Kropf, December 27, 2015, Paper. “We study sequential investment decisions in the venture capital (VC) industry. VC-backed companies typically need to raise several rounds of funding from VC funds. The decision whether to provide further funding to the company and the terms of the new funding determine VC fund returns. We show that investment outcomes in the VC industry can be predicted by whether a round of funding is provided by only VCs who previously invested in the firm, or new VCs join the syndicate of investors. With asymmetric information, financial intermediaries are often thought to “hold up” firms and earn rents on their inside knowledge. However, we show that inside rounds, in which only existing investors participate, lead to a higher likelihood of failure, lower probability of IPOs, and lower cash on cash multiples than rounds with new investors. Inside rounds also appear to be negative NPV, suggesting that investors make inefficient continuation decisions …Link

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Cost of Experimentation and the Evolution of Venture Capital

Cost of Experimentation and the Evolution of Venture Capital. Ramana Nanda, Matthew Rhodes-Kropf, December 2015, Paper. “We study adaptation by financial intermediaries as a response to technological change in the context venture-capital finance. Using a theoretical model and rich data, we are able to both document and provide a framework to understand the changes in the investment strategy of VCs in recent years – an increased prevalence of investors who “spray and pray” – providing a little funding and limited governance to an increased number of startups that they are more likely to abandon, but where early experiments significantly inform beliefs about the future potential of the venture. We also highlight how this adaptation by financial intermediaries has altered the trajectory of aggregate innovation away from complex technologies where initial experiments cost more towards those where information on future prospects is revealed quickly and cheaply …Link

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Financing Entrepreneurial Experimentation

Financing Entrepreneurial Experimentation. Ramana Nanda, Matthew Rhodes-Kropf, June 2015, Paper, “The fundamental uncertainty of new technologies at their earliest stages implies that it is virtually impossible to know the true potential of a venture without learning about its viability through a sequence of investments over time. We show how this process of experimentation can be particularly valuable in the context of entrepreneurship because most new ventures fail completely, and only a few become extremely successful. We also shed light on important costs to this process of experimentation…Link

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Inside Rounds and VC Returns

Inside Rounds and VC Returns. Matthew Rhodes-Kropf, May 4, 2015, Paper. “We study sequential investment decisions in the venture capital (VC) industry. VC-backed companies typically need to raise several rounds of funding from VC funds. The decision whether to provide further funding to the company and the terms of the new funding determine the returns of VC funds and their ability to back successful companies. We show that investment outcomes in the VC industry can be predicted by whether the existing VC investors can attract new outside investors to participate in the next round. Inside rounds, in which only existing investors participate, lead to a higher likelihood of failure, lower probability of IPOs, and lower cash on cash multiples than outside rounds. We explore a number of possible explanations for this result including escalation of commitment, mismeasurement of returns and too little capital. The strong relationship between inside rounds and outcomes remains.” Link

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Corporate Financial Policies in Overvalued Credit Markets

Corporate Financial Policies in Overvalued Credit Markets, Matthew Rhodes-Kropf, March 16, 2015, Paper, We investigate the repercussions of credit market mistakes for a firm’s borrowing and investment decisions. When credit ratings are relatively optimistic, we find evidence that firms take advantage of inaccuracies by issuing more debt, increasing leverage, rolling over more debt and lengthening maturities. The result goes beyond a wealth transfer and has real investment implications: approximately 75% of the funds raised from debt issuance related to credit rating mistakes was used for capital expenditures and cash acquisitions. In the cross section, credit rating mistakes affect financially constrained firms the most, suggesting that debt overvaluation loosens financial constraints. Link

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Entrepreneurship as Experimentation

Entrepreneurship as Experimentation. William R. Kerr, Ramana Nanda, Matthew Rhodes-Kropf, Summer 2014, Paper. “Entrepreneurship research is on the rise, but many questions about its fundamental nature still exist. We argue that entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed, and unknowable until an investment is made. At a macro level, experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level, investment and continuation decisions are not always made in a competitive Darwinian contest…” Link

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Investment Cycles and Startup Innovation

Investment Cycles and Startup Innovation. Ramana Nanda, Matthew Rhodes-Kropf, November 2013, Paper. “We find that VC-backed firms receiving their initial investment in hot markets are more likely to go bankrupt, 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…” Link

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