Working Paper Revision

Financing Ventures


Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital: statistics by funding round concerning success rates, failure rates, investment rates, equity shares, and IPO values. The increased efficiency offered by venture capital for financing inventive startups is important for long-run growth and welfare.

Keywords: capital gains taxation; dynamic contracts; endogenous growth; evaluating; financial development; funding rounds; IPO; monitoring; startups; research and development; venture capital;

JEL Classification: E13; E22; G24; L26; O16; O31; O40;

https://doi.org/10.20955/wp.2017.035

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2021-09-27

Number: 2017-035

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