Debt Financing of High-growth Startups

Timo Fischer and Gaétan de Rassenfosse

No 11-04, DRUID Working Papers from DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies

Abstract: We study the business model of venture debt firms, specialized institutions that provide loans to high-growth startups. Venture debt represents an apparent contradiction with traditional debt theory since startups have negative cash flows and lack tangible assets to secure the loan. Yet, we estimate that the U.S. venture debt industry provides at least one venture debt dollar for every seven venture capital dollars invested. We aim to provide the first empirical evidence on the determinants of the lending decision. Building on existing field interviews and case studies, we design a choice experiment of the lending decision and conduct experiments with 55 senior venture lenders. We find support for the hypothesis that backing by venture capital firms substitutes for startups’ cash flow. Furthermore, we illustrate the signaling effect of patents and their role as collateral to facilitate the lending decision.

Keywords: Venture capital; startups; patents (search for similar items in EconPapers)
JEL-codes: G24 O31 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban and nep-ent
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Citations: View citations in EconPapers (6)

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