Risky Business: Venture Capital, Pivoting and Scaling

Norbäck, Pehr-Johan, Lars Persson and Tåg, Joacim
Authors registered in the RePEc Author Service: Joacim Tåg and Pehr-Johan Norbäck

No 19176, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The creation and scaling of startups are inherently linked to risk-taking, with various types of owners handling these risks differently. This paper investigates the influence of an active venture capital (VC) market on startups’ decisions regarding research and scaling. It outlines conditions under which VC-backed startups prefer riskier, yet potentially more rewarding strategies compared to independent startups. VC firms, by means of temporary ownership and compensation structures, introduce †exit costs†that make high-risk strategies more attractive to VC-backed startups. Moreover, an active VC market prompts startups to undertake higher initial risks, as VC firms provide support for pivoting after setbacks. Additionally, the presence of VC intensifies research risk among established firms, as their research initiatives are strategic complements to the risk choices of startups.

JEL-codes: G24 L26 M13 (search for similar items in EconPapers)
Date: 2024-06
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Related works:
Working Paper: Risky Business: Venture Capital, Pivoting and Scaling (2024)
Working Paper: Risky Business: Venture Capital, Pivoting and Scaling (2024)
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