Series: Working Papers. 1519.
Author: Yael V. Hochberg, Carlos J. Serrano and Rosemarie H. Ziedonis.
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Abstract
This paper investigates the market for lending to technology startups (i.e. venture lending) and examines two mechanisms that facilitate trade within it: the ’saleability’ of patent collateral and financial intermediaries. We find that intensified trading in the secondary market for patent assets increases the annual rate of startup lending, particularly for startups with more re-deployable patent assets. Moreover, we show that the credibility of venture capitalist commitments to refinance and grow fl edgling companies is vital for startup debt provision. Following a severe and unexpected capital supply shock for VCs, we find a striking flight to safety among lenders, who continue to finance startups whose investors are better able to credibly commit to refinancing their portfolio companies, but withdraw from otherwise promising projects that may have most needed their funds. The findings are consistent with predictions of incomplete contracting and financial intermediation theory.