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Risky Business: Venture Capital, Pivoting and Scaling

IFN Working Paper No. 1444

50 Pages Posted: 5 Dec 2022 Last revised: 30 Sep 2023

See all articles by Pehr-Johan Norbäck

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Joacim Tåg

Research Institute of Industrial Economics (IFN); Hanken School of Economics

Date Written: October 1, 2023

Abstract

The creation and scaling of startups are associated with risk-taking and different types of owners treat these risks differently. We show how an active venture capital (VC) market affects risk-taking in research and scaling decisions of startups. VC-backed startups will choose more high-risk, high-reward research and scaling strategies than independent startups. The reason is temporary ownership and the compensation structures used in the VC industry. These create "exit costs" for VC-backed startups that imply that riskier strategies pay off. We also show that the presence of an active VC market may induce startups to take more risks initially since VC firms can help startups pivot in case of failure.

Keywords: Entrepreneurship, pivoting, scaling, venture capital.

JEL Classification: G24, L26, M13.

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars and Tåg, Joacim, Risky Business: Venture Capital, Pivoting and Scaling (October 1, 2023). IFN Working Paper No. 1444, Available at SSRN: https://ssrn.com/abstract=4280389 or http://dx.doi.org/10.2139/ssrn.4280389

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joacim Tåg (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

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