HEC Research Papers Series,
HEC Paris

Abstract: This paper develops a theory of how continuation-based financing shapes entrepreneurial search by influencing which experiments entrepreneurs choose to run. Ventures dependent on external financing often need to produce evidence that is legible to investors before they can act on what they learn. Financing systems therefore do not merely evaluate entrepreneurial progress; they shape the search portfolio from which evidence arises. I theorize a venture's search portfolio as the allocation of scarce experimental resources across experiments that differ in diagnostic value and financing legibility. Continuation-based financing can pull entrepreneurs toward experiments whose outputs are easier to observe and verify, even when less legible experiments would better resolve the strategic uncertainty facing the venture.

Keywords: Entrepreneurial Finance; Bayesian; Learning; Experimentation; Entrepreneurship

JEL-codes: L26

38 pages, First version: May 27, 2026. Revised: May 28, 2026.

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