How does staging of new venture investments create value for the entrepreneur?

What about for

the investor

Staging finance is defined as the process where the venture capitalist exerts enormous

control over portfolio companies to raise capital repeatedly in order to allow the entrepreneur to

progress to the next milestone in its business plan (Smith D. G., 1999). In staged financing, the

entrepreneur gains financing commitment but they do not have cash on hand. It reflects them to

wait and see the proposal (Smith, Smith, & Bliss, 2011, pp. 542-543). It may raise some

questions on the mind of entrepreneur like they really get capital that the investor promises to

give. In order to gain more benefit, the entrepreneur must have right investment partners and a

good project. As much as the entrepreneur performed well in new venture financing, the chance

of achieving the capital in installment is high. In other words, they lose expected money if they

do not perform well their project (Driffill, 2003). Therefore, staging of new venture investment

motivate entrepreneur to do better in their venture and reduce uncertainty risk of entrepreneur.

On the investors perspectives, staged financing allows them to reduce the risk of

investment. They do not investment whole money they promise but pay in installment. So, it

gives them to evaluate entrepreneurs capital in the new investor and do not further investment

other capital if they do not satisfy with them (Wang & Zhou, 2004).

Overall, staging financing can benefit both parties though the venture fails. The

entrepreneur and investors had positioned to make clean breaks and to stop investing time and

capital in the venture if they feel the new venture did not perform smoothly (Smith, Smith, &

Bliss, 2011). In this way, the staging of new venture investment saves the entrepreneur and

investors time and capital.

References
Driffill, J. (2003). Growth and Finance. The Manchester School, 71(4), 363-380.

Smith, D. G. (1999). Team production in venture capital investing. Journal of Corporation Law,

24(4), 949-973.

Smith, J. K., Smith, R. L., & Bliss, R. T. (2011). Entrepreneurial finance: Strategy, valuation

and deal structure. Stanford Economics and Finance.

Wang, S., & Zhou, H. (2004). Staged financing in venture capital: Moral hazard and risks.

Journal of Corporate Finance, 10(1), 131-155.