Priors, Experiments, Learning and Persuasion in (Bayesian) Entrepreneurial Finance

Ramana Nanda

No 25-020, Harvard Business School Working Papers from Harvard Business School

Abstract: At the heart of entrepreneurial finance lies a persuasion challenge: regardless of the strength of an entrepreneur’s belief in the potential of their idea, they typically need to convince investors to provide the financial capital required for its commercialization. How should entrepreneurs approach this challenge in order to maximize the chance of raising the required external finance? Why does it appear harder to persuade venture capital investors to finance startups in certain industries and regions and in certain periods of time? Are there systematic frictions preventing entrepreneurs from effectively persuading investors in certain settings and if so, what can be done to reduce them? In this chapter, I discuss answers to these and other questions through a conceptual framework in which investors update their beliefs about a startup’s prospects through a sequence of investments over time.

Pages: 31 pages
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