The Leveraging of Silicon Valley / Jesse Davis, Adair Morse, Xinxin Wang.

Format:

Book

Author/Creator:

Davis, Jesse.

Contributor:

National Bureau of Economic Research.

Morse, Adair.

Wang, Xinxin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27591.

NBER working paper series no. w27591

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

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.

Notes:

Print version record

July 2020.