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Tolerating Losses for Growth: J-Curves in Venture Capital Investing

Author

Listed:
  • Hellmann, Thomas

    (Sa¨ıd Business School, Oxford University and NBER)

  • Montag, Alexander

    (Kelley School of Business, Indiana University, and)

  • Tåg, Joacim

    (Research Institute of Industrial Economics (IFN))

Abstract

Startups face a trade-off between short-term profitability versus long-term growth where investors tolerate prolonged financial losses. We present a new theory and empirical evidence about the existence and shape of so-called J-curves. The theory predicts that investors facing better exit opportunities have a higher loss tolerance, encouraging startups to pursue more ambitious growth strategies. Empirically, we examine a large Swedish dataset with detailed cash flow information. Swedish startups backed by US venture capitalists experience deeper J-curves than those backed by non-US venture capitalists. They have more successful exits, higher exit values, faster sales growth, and more follow-on funding.

Suggested Citation

  • Hellmann, Thomas & Montag, Alexander & Tåg, Joacim, 2024. "Tolerating Losses for Growth: J-Curves in Venture Capital Investing," Working Paper Series 1500, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1500
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    More about this item

    Keywords

    Venture capital; Loss tolerance; J-curves; Entrepreneurship; Exits;
    All these keywords.

    JEL classification:

    • F39 - International Economics - - International Finance - - - Other
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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