What is the Effect of the Financial Crisis on Venture Capital Financing? Empirical Evidence from US Internet Start-Ups
Venture Capital - An International Journal of Entrepreneurial Finance, Vol. 11, No. 4, pp. 295-309, 2009
21 Pages Posted: 6 Apr 2009 Last revised: 3 Oct 2014
Date Written: April 6, 2009
Employing a large dataset of venture capital investments in US Internet firms, we analyze the effect of the current financial crisis on the venture capital market. Using regression analysis, we find that the financial crisis is associated with a 20% decrease in the average amount of funds raised per funding round. This effect, however, can only be found in later funding rounds. We argue that firms in later financing rounds that need capital to survive cannot avoid a deduction induced by the financial crisis, whereas firms that seek initial funding postpone their funding and expansion plans until the capital markets have stabilized. Fur-thermore, firms in later phases of the venture cycle are more likely to be negatively affected by the weak IPO market than firms seeking initial funding. Our results suggest that the finan-cial crisis can lead to a severe ‘funding gap’ in the financing of technological development and innovation.
Keywords: Entrepreneurship, Financial Crisis, Venture Capital, Innovation Finance, Entrepreneurial Finance, CrunchBase
JEL Classification: L26, G24, O30
Suggested Citation: Suggested Citation