Why deep pockets make great borrowers: an empirical analysis of venture loans

Abstract

Startups typically have no positive cash flow, little collateral to offer, and high bankruptcy rates. As a result, they seem to be poor loan candidates. However, venture loans as hybrid form financing that include a loan and a warrant are used in practice. We focus on this distinct form of venture debt and identify characteristics of startups and their financing history that are related to their probability of receiving a venture loan. We use an unbalanced panel data sample of 13,540 companies that have conducted 27,577 financing rounds. Our key finding is that venture loans are associated with strongly committed existing investors, which stimulates the requirements of venture lenders and is signaled through large invested capital amounts per investor in previous rounds. Furthermore, we find that venture loans are associated with rather mature startups and offer empirical indication that the medical, health, and life science industry with clear milestones provides good conditions for venture loans.

Innovation, asymmetric information and the capital structure of new firms

“…The research design of this study investigates co-occurrences but does not delve deeper in the mechanisms that correlate one source to the others. For instance, recent evidence shows that firms receiving venture capital investments are less likely to obtain, afterwards, government-sponsored loans (Giraudo, Giudici, and Grilli 2019), while they increase the likelihood to receive venture loans (Lehnertz, Plagmann, and Lutz 2022). Conversely, receiving public subsidies or government grants might signal start-up quality to future capital providers, increasing the likelihood to receive bank debt or venture capital investments (Hottenrott, Lins, and Lutz 2018;Berger and Hottenrott 2021;Svetek 2022;Santoleri et al 2022;Howell 2017).…”

“…This leads us to discuss an additional limitation of our results. Indeed, despite using a level of detail on the sources of finance uncommon in previous studies, we are aware that in recent years new financing tools have emerged, including accelerators, crowdfunding, new financing techniques for equity capital (Parra and Winter 2022) and venture loans (Lehnertz, Plagmann, and Lutz 2022) (for a comprehensive list, see Bertoni et al (2021) and (Rao et al 2021). New types of finance may grow from niche markets to mainstream sources of entrepreneurial finance, but it is still early day, and these segments of the external capital markets are either not yet included in official statistics or not yet covered by sufficiently long time series.…”