Start-up Financing, Entry and Innovation

[New draft coming soon]


I develop a tractable equilibrium model of start-up development to examine and quantify the implications of frictions in access to venture capital (VC) funding. The model features endogenous entry, search-and-matching dynamics between start-ups and VCs and endogenous financial contracts subject to agency conflicts. A key feature of the model is that firms may fail due to financing risk—the inability to secure follow-on funding for otherwise viable firms. I estimate the model on US micro data and show that it captures a rich set of empirical moments. My estimates suggest that a substantial share (24%) of US VC-backed start-ups fail due to financing risk and that a significant share (11%) of US VC funding is misallocated to start-ups that should have closed down. To explore the implications of financing risk in other settings, I conduct a case study of the UK. I find that limited funding and acquisition opportunities increase the likelihood of failure by more than 15 percentage points for UK start-ups relative to their US counterparts. Finally, I study how financing risk biases VC funding away from long-term projects with fewer acquisition opportunities, estimating that in its absence, the share of VC-backed start-ups in software and services would fall from 61% to 46%, offset by growth in science-driven sectors.


External Conferences & Presentations:

CERF Best Student Paper Award – 2024