Cost of Experimentation and the Evolution of Venture Capital
Michael Ewens Author-Email: email@example.com,
Ramana Nanda () and
Additional contact information
Michael Ewens Author-Email: firstname.lastname@example.org: California Institute of Technology,
No 15-070, Harvard Business School Working Papers from Harvard Business School
We study how technological shocks to the cost of starting new businesses have led the venture capital model to adapt in fundamental ways over the prior decade. We both document and provide a framework to understand the changes in the investment strategy of VCs in recent years - an increased prevalence of a \spray and pray" investment approach - where investors provide a little funding and limited governance to an increased number of startups that they are more likely to abandon, but where initial experiments significantly inform beliefs about the future potential of the venture. This adaptation and related entry by new financial intermediaries has led to a disproportionate rise in innovations where information on future prospects is revealed quickly and cheaply, and reduced the relative share of innovation in complex technologies where initial experiments cost more and reveal less.
Keywords: Innovation; Venture Capital; Investing; Abandonment Option; Failure Tolerance (search for similar items in EconPapers)
JEL-codes: G24 O31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-ino
Date: 2015-02, Revised 2017-03
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
http://www.hbs.edu/faculty/pages/download.aspx?name=15-070.pdf Revised version, 2017 (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:hbs:wpaper:15-070
Access Statistics for this paper
More papers in Harvard Business School Working Papers from Harvard Business School Contact information at EDIRC.
Series data maintained by Soebagio Notosoehardjo ().