Cost of Experimentation and the Evolution of Venture Capital / Michael Ewens, Ramana Nanda, Matthew Rhodes-Kropf.

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Ewens, Michael

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w24523.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: 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 venture capitalists (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 reduced the relative share of innovation in complex technologies where initial experiments cost more and reveal less.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w24523 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w24520 Sweat Equity in U.S. Private Business /	nber w24521 Forward Guidance /	nber w24522 Optimal Fiscal Policy without Commitment: Beyond Lucas-Stokey /	nber w24523 Cost of Experimentation and the Evolution of Venture Capital /	nber w24524 The Production of Cognitive and Non-cognitive Human Capital in the Global Economy /	nber w24525 Indivisibilities in Distribution /	nber w24526 How Redeployable are Patent Assets? Evidence from Failed Startups /	Next

April 2018.

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 venture capitalists (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 reduced the relative share of innovation in complex technologies where initial experiments cost more and reveal less.