Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1444: Risky Business: Venture Capital, Pivoting and Scaling

Pehr-Johan Norbäck (), Lars Persson () and Joacim Tåg ()
Additional contact information
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Joacim Tåg: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

Abstract: The creation and scaling of startups are associated with risk-taking and different types of owners treat these risks differently. We show how an active venture capital (VC) market affects risk-taking in research and scaling decisions of startups. VC-backed startups will choose more high-risk, high-reward research and scaling strategies than independent startups. The reason is temporary ownership and the compensation structures used in the VC industry. These create ”exit costs” for VC-backed startups that imply that riskier strategies pay off. We also show that the presence of an active VC market may induce startups to take more risks initially since VC firms can help startups pivot in case of failure.

Keywords: Entrepreneurship; Pivoting; Scaling; Venture capital

JEL-codes: G24; L25; M13

Language: English

48 pages, November 18, 2022

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