Financing Risk And Bubbles Of Innovation
Source: Harvard University
Investors in risky startups who stage their investments face financing risk - that is, the risk that later stage investors will not fund the startup, even if the fundamentals of the firm are still sound. They show that financing risk is part of a rational equilibrium where investors can flip from investing to not investing in certain sectors of the economy. They further demonstrate that financing risk has the greatest impact on firms with the most real option value. Hence, the mix of projects funded and type of investors who are active varies with the level of financing risk in the economy.