Abstract
ABSTRACT Motivated by the substantial growth and upfront investments of venture capital (VC)‐backed firms observed in administrative US Census data, this study develops a life‐cycle firm dynamics model. In the model, startups choose the source of financing from VC, angel investors, or banks, depending on their growth potential, and invest in innovation. The calibrated model explains the life‐cycle dynamics of firms with different sources of financing and suggests that venture capitalists' managerial advice accounts for around 22% of the growth in VC‐backed firms. A counterfactual economy without VC financing would experience an aggregate consumption loss of around 0.46%.