Entrepreneurs must experiment to learn how good they are at a new activity.
What happens when the experimentation is financed by a lender? Under common
scenarios, i.e., when there is the opportunity to learn by "starting small" or when
"no-compete" clauses cannot be enforced ex-post, we show that financing experi-
mentation can become harder precisely when it is more profitable, i.e., for lower
values of the known-arm and for more optimistic priors. Endogenous collateral
requirements (like those frequently observed in micro-credit schemes) are shown to
be part of the optimal contract
