Michael Ewens is Associate Professor of Finance and Entrepreneurship at the California Institute of Technology; Ramana Nanda is the Sarofim-Rock Professor of Business Administration at Harvard Business School; and Matthew Rhodes-Kropf is Visiting Associate Professor of Finance at the MIT Sloan School of Management. This post is based on their recent article, forthcoming in the Journal of Financial Economics.
Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here), and Agency Costs of Venture Capitalist Control in Startups by Jesse Fried and Mira Ganor.
The introduction of cloud computing services in the mid 2000s was a fundamental technological shift that has also had an impact on the financing landscape for Internet and web-based startups. A key benefit of cloud computing for such startups is the ability to “rent” hardware space in small increments and scale up as demand grows, instead of making large upfront investments when the outcome of the venture is still uncertain. Entrepreneurs and investors can therefore learn about the viability of startups with substantially less funding, lowering the cost of financing initial “experiments” that can help investors learn about the potential of new ventures before committing further capital.
