Cost of experimentation and the evolution of venture capital
Michael Ewens (),
Ramana Nanda () and
Matthew Rhodes-Kropf ()
Journal of Financial Economics, 2018, vol. 128, issue 3, 422-442
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 venture capitalists (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; Entrepreneurship; Investing; Abandonment options (search for similar items in EconPapers)
JEL-codes: G24 G32 O31 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Cost of Experimentation and the Evolution of Venture Capital (2018)
Working Paper: Cost of Experimentation and the Evolution of Venture Capital (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:128:y:2018:i:3:p:422-442
Access Statistics for this article
Journal of Financial Economics is currently edited by G. William Schwert
More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Haili He ().