Journal
MANAGEMENT SCIENCE
Volume 63, Issue 4, Pages 901-918Publisher
INFORMS
DOI: 10.1287/mnsc.2015.2350
Keywords
innovation; venture capital; investing; experimentation; real options; financing risk
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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.
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