The Leveraging of Silicon Valley

67 Pages Posted: 28 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: July 2020

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.

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Suggested Citation

Davis, Jesse and Morse, Adair and Wang, Xinxin, The Leveraging of Silicon Valley (July 2020). NBER Working Paper No. w27591, Available at SSRN: https://ssrn.com/abstract=3661083

Jesse Davis (Contact Author)

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

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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