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Risky Business: Venture Capital, Pivoting and Scaling

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  • Norbäck, Pehr-Johan
  • Persson, Lars
  • TÃ¥g, Joacim

Abstract

The creation and scaling of startups are inherently linked to risk-taking, with various types of owners handling these risks differently. This paper investigates the influence of an active venture capital (VC) market on startups’ decisions regarding research and scaling. It outlines conditions under which VC-backed startups prefer riskier, yet potentially more rewarding strategies compared to independent startups. VC firms, by means of temporary ownership and compensation structures, introduce †exit costs†that make high-risk strategies more attractive to VC-backed startups. Moreover, an active VC market prompts startups to undertake higher initial risks, as VC firms provide support for pivoting after setbacks. Additionally, the presence of VC intensifies research risk among established firms, as their research initiatives are strategic complements to the risk choices of startups.

Suggested Citation

  • Norbäck, Pehr-Johan & Persson, Lars & TÃ¥g, Joacim, 2024. "Risky Business: Venture Capital, Pivoting and Scaling," CEPR Discussion Papers 19176, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19176
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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