More from these Authors

• Article | Journal of Financial Economics | June 2018

  Cost of Experimentation and the Evolution of Venture Capital

  Michael Ewens, Ramana Nanda and Matthew Rhodes-Kropf

  We study how technological shocks to the cost of starting new businesses have led the venture capital model to adapt in fundamental ways over the prior decade. We both document and provide a framework to understand the changes in the investment strategy of VCs in recent years—an increased prevalence of a "spray and pray" investment approach—where investors provide a little funding and limited governance to an increased number of startups that they are more likely to abandon, but where initial experiments significantly inform beliefs about the future potential of the venture. This adaptation and related entry by new financial intermediaries has led to a disproportionate rise in innovations where information on future prospects is revealed quickly and cheaply and has reduced the relative share of innovation in complex technologies where initial experiments cost more and reveal less.

  Keywords: innovation; venture capital; Investing; abandonment option; Technological Innovation; Venture Capital; Investment;

  Citation:

  Ewens, Michael, Ramana Nanda, and Matthew Rhodes-Kropf. "Cost of Experimentation and the Evolution of Venture Capital." Journal of Financial Economics 128, no. 3 (June 2018): 422–442.  View Details

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• Article | Management Science | April 2017

  Financing Risk and Innovation

  Ramana Nanda and Matthew Rhodes-Kropf

  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 financing risk―a forecast of limited future funding―by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need "hot" financial markets to get through the initial period of discovery or diffusion.

  Keywords: Risk and Uncertainty; Financing and Loans; Innovation and Invention;

  Citation:

  Nanda, Ramana, and Matthew Rhodes-Kropf. "Financing Risk and Innovation." Management Science 63, no. 4 (April 2017): 901–918.  View Details

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• Simulation | December 2016

  Venture Capital and Private Equity Game

  Matthew Rhodes-Kropf, Josh Lerner, G. Felda Hardymon, Nathaniel Burbank, Matthew Rhodes-Kropf, Josh Lerner, G. Felda Hardymon and Nathaniel Burbank

  The Venture Capital and Private Equity Simulation enables groups of students to play the role of either an early or later stage private equity firm. Within the simulation, students raise funds, search for companies to invest in, complete deals, and manage a portfolio of companies across a number of simulated years. The simulation is intended to emphasize how the different activities in a private equity firm’s lifecycle (fundraising, investing, governing, and exiting) are impacted by the state of the financial markets, as well as the many agency, information and coordination problems that plague the industry. The simulation allows students to experience firsthand many of the concepts raised in class cases and in supporting research.

  Keywords: venture capital; private equity; Venture Capital; Private Equity;

  Citation:

  Rhodes-Kropf, Matthew, Josh Lerner, G. Felda Hardymon, and Nathaniel Burbank. "Venture Capital and Private Equity Game." Harvard Business School Simulation 815-709, December 2016.  View Details

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