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Why deep pockets make great borrowers: an empirical analysis of venture loans

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  • Nico Lehnertz

    (Heinrich Heine University)

  • Carolin Plagmann

    (Heinrich Heine University)

  • Eva Lutz

    (Heinrich Heine University)

Abstract

Startups typically have no positive cash flow, little collateral to offer, and high bankruptcy rates. As a result, they seem to be poor loan candidates. However, venture loans as hybrid form financing that include a loan and a warrant are used in practice. We focus on this distinct form of venture debt and identify characteristics of startups and their financing history that are related to their probability of receiving a venture loan. We use an unbalanced panel data sample of 13,540 companies that have conducted 27,577 financing rounds. Our key finding is that venture loans are associated with strongly committed existing investors, which stimulates the requirements of venture lenders and is signaled through large invested capital amounts per investor in previous rounds. Furthermore, we find that venture loans are associated with rather mature startups and offer empirical indication that the medical, health, and life science industry with clear milestones provides good conditions for venture loans.

Suggested Citation

  • Nico Lehnertz & Carolin Plagmann & Eva Lutz, 2022. "Why deep pockets make great borrowers: an empirical analysis of venture loans," Journal of Business Economics, Springer, vol. 92(9), pages 1431-1453, November.
    • Handle: RePEc:spr:jbecon:v:92:y:2022:i:9:d:10.1007_s11573-022-01084-x
    DOI: 10.1007/s11573-022-01084-x
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    Cited by:

    1. Wolfgang Breuer & Andreas Pfingsten, 2022. "Non-standard issues in business finance: an overview," Journal of Business Economics, Springer, vol. 92(9), pages 1417-1430, November.
    2. Hogrebe, Fabian & Lutz, Eva, 2024. "The sunk cost fallacy in venture capital staging: Decision-making dynamics for follow-on investment rounds," Journal of Corporate Finance, Elsevier, vol. 86(C).
    3. Dustin Bauer & Sebastian Junge & Tobias Reif, 2024. "May the resources be with you: a systematic review and framework of startup funding options," Management Review Quarterly, Springer, vol. 74(3), pages 1365-1396, September.

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    More about this item

    Keywords

    Venture lending; Venture debt; Venture loan; Venture capital;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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