Positive effects of portfolio financing strategy for startups

Abstract

Based on the startup investment database, we empirically examine the positive effects of a portfolio financing strategy for startups. It is known that some investment banks or venture companies have supplied risky and patient capital to U.S. startups of all financial corporations. They provide differentiated debt financing to startups who already received equity financing and invest more in equity when the startup is younger. Empirical analysis shows that the core risk management is to have a dynamic financing ratio between equity and debt as well as varied equity cost of capital, lending rate and investment horizon based on the age, technology, and financial soundness of a startup. We also find that optimal portfolio financing strategy can help startups raise funds with ease, but also it provides investors with higher expected return on investment, which can facilitate financing for startups and furthermore small and medium enterprises.