Liquidity runway and horizon of disappointment

Hesse, M and Lutz, E and Talmor, E (2016) Liquidity runway and horizon of disappointment. Journal of Alternative Investments, 19 (2). pp. 28-37. ISSN 1520-3255

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Official URL: http://www.iijournals.com/doi/abs/10.3905/jai.2016...

Abstract

This article discusses venture debt as an important source of funding for young innovative firms, one that is rooted in a unique economic model. The authors present a detailed analysis of the concept and its multiple elements. Through unique access to deal-level data from a European venture lending fund, they underline the analysis with empirical data to explain the interdependencies among venture lenders, start-ups, and venture capitalists and how missing track records, tangible assets, and positive cash flows can be substituted in venture lending deals. Their results suggest that venture capitalists as well as intellectual property play a crucial role in the venture lender’s decision by signaling attributes of the start-up to the lender. The authors outline the risk-reduction instruments applied by the venture lender in mitigating default risk despite high volatility and a lack of conventional collateral. They then link this to the concept of the J curve, in which the authors use insights from option-pricing theory to rationalize the security design.

Item Type: Article
Additional Information: © 2016 Institutional Investor LLC
Subjects: V > Venture capital companies
R > Risk
Subject Areas: Accounting
DOI: 10.3905/jai.2016.19.2.028
Date Deposited: 13 Dec 2016 15:03
Last Modified: 13 Dec 2016 15:09
URI: http://lbsresearch.london.edu/id/eprint/756

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