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.

Introduction

     Startups play a significant role in economic growth. First, they create many jobs in various industries. If a startup drives technological innovation, new industries are created, resulting in various new jobs. After David Packard and William R. Hewlett set up their audio oscillator business in Silicon Valley in 1939, radio and telegraph technology grew rapidly, providing jobs to many young people. Over the years, innovative startups have emerged in the semiconductor and information technology industries, such as Apple, Facebook, Google, IBM, Microsoft, and Uber. Furthermore, as a startup grows into a large company, it also inspires workers to establish their own startups by taking inspiration from entrepreneurs who have already experienced success. Simply put, just as startups create jobs, an entrepreneur with a created job establishes a new startup, causing a positive feedback loop in job creation. As shown in Fig. 1, the job growth in Silicon Valley and San Francisco rose by 30%–۳۵% from 2010 to 2018, which is much higher than the average job growth rates of the USA, Germany, Japan, South Korea, and China.

Conclusion and implications

     Startups drive economic growth by creating jobs, increasing TFP, and allocating resources efficiently. A portfolio financing strategy can help activate startups. Some investment banks, such as the SVB, have adopted a differentiated portfolio financing strategy for both debt and equity financing. They invest more in equity when the firm is young and invest more in debt as the firm ages. They also manage the credit risk of loan portfolios.