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  • April 2017
  • Article
  • Management Science

Financing Risk and Innovation

By: Ramana Nanda and Matthew Rhodes-Kropf
  • Format:Print
  • | Pages:44
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Abstract

We provide a model of investment into new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk―a forecast of limited future funding―by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need "hot" financial markets to get through the initial period of discovery or diffusion.

Keywords

Risk and Uncertainty; Financing and Loans; Innovation and Invention

Citation

Nanda, Ramana, and Matthew Rhodes-Kropf. "Financing Risk and Innovation." Management Science 63, no. 4 (April 2017): 901–918.
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About The Author

Ramana Nanda

Entrepreneurial Management
→More Publications

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    Investment Committee Voting and the Financing of Innovation

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    Venture Capital Booms and Startup Financing

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    SafeGraph: Selling Data as a Service

    By: Ramana Nanda, Abhishek Nagaraj and Allison Ciechanover
More from the Authors
  • Investment Committee Voting and the Financing of Innovation By: Andrey Malenko, Ramana Nanda, Matthew Rhodes-Kropf and Savitar Sundaresan
  • Venture Capital Booms and Startup Financing By: William Janeway, Ramana Nanda and Matthew Rhodes-Kropf
  • SafeGraph: Selling Data as a Service By: Ramana Nanda, Abhishek Nagaraj and Allison Ciechanover
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