Financing Ventures

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: viz., statistics for each round of funding that concern the success rates, failure rates, investment rates, equity shares, and IPO values. Counterfactual experiments suggest that long-term U.S. growth would drop from 1.8 percent to 1.4-1.5 percent if venture capital were replaced by more traditional methods of finance. Likewise, it would drop from 1.8 percent to 1.62 percent if VC-funded startups in the United States are taxed at the German rate. The welfare losses associated with these declines in long-term growth rates are large