RT Journal Article
SR Electronic
T1 Liquidity Runway and Horizon of Disappointment:
Business Model of Venture Lending
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 28
OP 37
DO 10.3905/jai.2016.19.2.028
VO 19
IS 2
A1 Mischa Hesse
A1 Eva Lutz
A1 Eli Talmor
YR 2016
UL https://pm-research.com/content/19/2/28.abstract
AB 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.TOPICS: Real assets/alternative investments/private equity, developed, credit risk management, options