Tolerating Losses for Growth: J-Curves in Venture Capital Investing

Thomas Hellmann (), Alexander Montag () and Joacim Tåg
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Alexander Montag: Kelley School of Business, Indiana University, and, Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden, https://www.ifn.se/en/researchers/affiliated-researchers/alexander-montag/

No 1500, Working Paper Series from Research Institute of Industrial Economics

Abstract: Startups face a trade-off between short-term profitability versus long-term growth where investors tolerate prolonged financial losses. We present a new theory and empirical evidence about the existence and shape of so-called J-curves. The theory predicts that investors facing better exit opportunities have a higher loss tolerance, encouraging startups to pursue more ambitious growth strategies. Empirically, we examine a large Swedish dataset with detailed cash flow information. Swedish startups backed by US venture capitalists experience deeper J-curves than those backed by non-US venture capitalists. They have more successful exits, higher exit values, faster sales growth, and more follow-on funding.

Keywords: Venture capital; Loss tolerance; J-curves; Entrepreneurship; Exits (search for similar items in EconPapers)
JEL-codes: F39 G24 L26 O16 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2024-08-27
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-ino and nep-sbm
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