The Leveraging of Silicon Valley

66 Pages Posted: 30 Jul 2018 Last revised: 16 Jul 2020

See all articles by Jesse Davis

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Adair Morse

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Xinxin Wang

UCLA Anderson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2018

Abstract

Early-stage firms utilize venture debt in one-third of financing rounds despite their general lack of cash flow and collateral. In our model, we show how venture debt aligns incentives within a firm. We derive a novel theoretical channel in which runway extension through debt increases firm value while potentially lowering closure. Consistent with the model's mechanism, we find that dilution predicts venture debt issuance. Empirically, treatment with venture debt lowers closure hazard by 1.6-4.4% and increases successful exits by 4.3-5.3%. Back-of-the-envelope calculations suggest $41B, or 9.4% of invested capital, remains productive due to venture debt.

Keywords: venture debt, venture lending, early-stage financing, entrepreneurship, start-up capital structure, levered equity, runway extension, moral hazard, optimality of debt, innovation finance

JEL Classification: G24, G32, L26, O3

Suggested Citation

Davis, Jesse and Morse, Adair and Wang, Xinxin, The Leveraging of Silicon Valley (April 1, 2018). Kenan Institute of Private Enterprise Research Paper No. 18-16, 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3222385 or http://dx.doi.org/10.2139/ssrn.3222385

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Adair Morse

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Xinxin Wang (Contact Author)

UCLA Anderson School of Management ( email )

Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/view/xinxinwang

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