EconPapers    
Economics at your fingertips  
 

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

Abstract: 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)
Date: 2018
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)
http://www.sciencedirect.com/science/article/pii/S0304405X18300631
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Cost of Experimentation and the Evolution of Venture Capital (2018) Downloads
Working Paper: Cost of Experimentation and the Evolution of Venture Capital (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:128:y:2018:i:3:p:422-442

DOI: 10.1016/j.jfineco.2018.03.001

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 ().

 
Page updated 2020-09-17
Handle: RePEc:eee:jfinec:v:128:y:2018:i:3:p:422-442