Tolerating Losses for Growth: J-Curves in Venture Capital Investing

Startups face a trade-off between short-term profitability versus long-term growth. Their cash flows are said to follow a so-called J-curve. The shape of the curve depends on investor tolerance for prolonged financial losses. US venture capitalists are commonly believed to have higher loss tolerance. We examine a large Swedish dataset with detailed cash flow information. Swedish startups backed by US venture capitalists experience deeper J-curves than those backed by non-US venture capitalists. In the long run, they have more successful exits, higher exit values, faster sales growth. Our evidence suggests that better access to funding and networks enable USVC investors to drive deeper J-curves.