Venture debt as bridge financing
Professor Juanita González-Uribe
Associate Professor in Finance
London School of Economics and Political Science
Using novel contract-level data from five major venture lenders, we document the counterintuitive pattern that venture-stage firms often borrow at moments of heightened uncertainty (either waiting on patent grants or analyzing the results of clinical trials), and prepay their loans aggressively when that uncertainty is resolved. To explain these patterns, we present a model in which a firm waiting on important information seeks bridge financing from investors who supply capital cheaply without seeking control, and debt is the natural security for them to use. Our analysis provides a novel theory of bridge debt that explains patterns in the venture debt market and plausibly extends to other settings.
