Working Paper: NBER ID: w27591
Authors: Jesse Davis; Adair Morse; Xinxin Wang
Abstract: Early-stage firms utilize venture debt in one-third of financing rounds despite their general lack of cash flow and collateral. In our model, we show how venture debt aligns incentives within a firm. We derive a novel theoretical channel in which runway extension through debt increases firm value while potentially lowering closure. Consistent with the model's mechanism, we find that dilution predicts venture debt issuance. Empirically, treatment with venture debt lowers closure hazard by 1.6-4.4% and increases successful exits by 4.3-5.3%. Back-of-the-envelope calculations suggest $41B, or 9.4% of invested capital, remains productive due to venture debt.
Keywords: venture debt; startups; financing; entrepreneurship; venture capital
JEL Codes: G24; G32; L26; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| venture debt aligns entrepreneur's incentives with firm goals (L26) | increased firm value (G32) |
| venture debt aligns entrepreneur's incentives with firm goals (L26) | increased survival rates (C41) |
| runway extension through venture debt (D25) | delay capital raises until positive signals revealed (G14) |
| runway extension through venture debt (D25) | reduced dilution (C29) |
| runway extension through venture debt (D25) | incentivizing riskier, value-maximizing strategies (L21) |
| venture debt issuance (G24) | lower closure hazards (Y20) |
| venture debt issuance (G24) | increased successful exits (L26) |
| treatment of levered equity (G12) | lower hazard of closure (G33) |
| runway loans (H81) | lower hazard of closure (G33) |