Scandinavian Working Papers in Economics
Working Paper Series,
Research Institute of Industrial Economics
No 1500: Tolerating Losses for Growth: J-Curves in Venture Capital Investing
Thomas Hellmann (), Alexander Montag () and Joacim Tåg ()
Additional contact information
Thomas Hellmann: Sa¨ıd Business School, Oxford University and NBER
Alexander Montag: Kelley School of Business, Indiana University, and, 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: 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.
Keywords: Venture capital; Loss tolerance; J-curves; Entrepreneurship; Exits
Language: English
75 pages, August 27, 2024
Full text files
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