Abstract
Technological revolutions and waves of creative destruction are associated with new ventures and the destruction of mature firms, but also with the failure of numerous startups, suggesting a time of increased experimentation in the economy. 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 increases in the forecasted probability of future funding by funding more innovative ideas. We propose that extremely novel technologies may need 'hot' finnancial markets to get through the initial period of discovery or diffusion.
Keywords: Business Startups;
Venture Capital;
Financial Markets;
Financing and Loans;
Investment;
Price Bubble;
Innovation and Invention;
Technological Innovation;
Risk and Uncertainty;
Citation:
Nanda, Ramana, and Matthew Rhodes-Kropf. "Financing Risk and Innovation." Harvard Business School Working Paper, No. 11–013, August 2010. (Revised July 2012.)