CANCELLED - Cost of Experimentation and the Evolution of Venture Capital

Finance

Further details

We study adaptation and entry by financial intermediaries as a response to technological change in the context of venture-capital finance. Using a theoretical model and rich data, we both document and provide a framework to understand the changes in the investment strategy of VCs in recent years - an increased prevalence of investors who "spray and pray" - providing a little funding and limited governance to an increased number of startups that they are more likely to abandon, but where early experiments significantly inform beliefs about the future potential of the venture. We also highlight how this adaptation by financial intermediaries has altered the trajectory of aggregate innovation away from complex technologies where initial experiments cost more towards those where information on future prospects is revealed quickly and cheaply.

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