Travail de recherche/Working paper
| Résumé : | This paper studies the situation of an entrepreneur who considers financing her own business project characterized by its non-tradability on the market, low divisibility and high risk. We rely on the investor’s expected return-variance framework and provide a model to identify the entrepreneur’s optimal portfolio allocation and her cost of capital (project’s hurdle rate) given her specific investing and financing constraints: own capital investment requirement in her project and borrowing cost spread. We relate the entrepreneur’s optimal portfolio to the one of an unconstrained investor with a similar risk aversion. We develop the entrepreneur’s optimal investment curve and show that it is related to the Capital Market Line. Finally, the modelled entrepreneur’s cost of capital is positively influenced by her risk aversion and the project’s (co)variances and size, and we show that the cost of capital can be decreased when combining the project with other assets and increasingly so when optimizing the allocation. After that, we perform a numerical analysis on a realistic entrepreneurial situation and obtain estimates of the entrepreneur’s cost of capital and optimal diversification. We investigate how public authorities may relax the entrepreneur’s constraints by providing subsidies, investments, loans and bank guarantees (directly or through VC funds or banks). Decreasing the entrepreneur’s investment in the project has the biggest impact on reducing the cost of capital compared to reducing the cost spread. Therefore, providing external financing is the most efficient public policy instrument to support entrepreneurs. |
