Working Paper: NBER ID: w20587
Authors: Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
Abstract: The use of debt to finance risky entrepreneurial-firm projects is rife with informational and contracting problems. Nonetheless, we document widespread lending to startups in three innovation-intensive sectors and in early stages of development. At odds with claims that the secondary patent market is too illiquid to shape debt financing, we find that intensified patent trading increases the annual rate of startup lending, particularly for startups with more redeployable (less firm-specific) patent assets. Exploiting differences in venture capital (VC) fundraising cycles and a negative capital-supply shock in early 2000, we also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending. Our study illuminates friction-reducing mechanisms in the market for venture lending, a surprisingly active but opaque arena for innovation financing, and tests central tenets of contract theory.
Keywords: venture lending; patent collateral; venture capital; entrepreneurial finance; innovation financing
JEL Codes: G24; L14; L26; O16; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased liquidity in the secondary patent market (G10) | likelihood of startups receiving loans (M13) |
| increased liquidity in the secondary patent market (G10) | annual rate of startup lending (M13) |
| credibility of venture capitalists (G24) | facilitating lending (G21) |
| recently closed funds by venture capitalists (G24) | lending rates (G21) |
| older funds by venture capitalists (G24) | tighter capital constraints (F65) |