Staged investments in entrepreneurial financing |
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| Authors: | Sandeep Dahiya Korok Ray |
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| Institution: | 1. Miami University, Farmer School of Business, 800 East High Street, Oxford, OH 45056, United States of America;2. Mississippi State University, College of Business, PO Box 9580, Mississippi State, MS 39762, United States of America;1. EMLYON Business School — Department of Economics, Finance and Control and Research Center on Entrepreneurial Finance (ReCEntFin), France;2. Utrecht University — School of Economics, The Netherlands;1. School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, United Kingdom, GEP;2. School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, United Kingdom, GEP and CESIfo;3. Düsseldorf Institute for Competition (DICE), Heinrich-Heine University, Universitaetsstr. 1, 40225 Düsseldorf, Germany and GEP |
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| Abstract: | Venture capitalists deliver investments to entrepreneurs in stages. This paper shows staged financing is efficient. Staging lets investors abandon ventures with low early returns, and thus sorts good projects from bad. The primary implication from staging is that it is efficient to invest more in later rounds. The model yields a number of predictions on how the ratio of early to late round financing varies with uncertainty, the outside options of both parties, the value of the venture, the costs of investment, and project difficulty. We test these predictions against data on venture capital financings and find significant empirical support for the theory. |
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