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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

Jorn H. Block

University of Trier - Faculty of Management; Erasmus University Rotterdam (EUR) - Institute of Management (ERIM)

Philipp G. Sandner

Frankfurt School of Finance & Management

Date Written: April 6, 2009

Abstract

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

Block, Jorn H. and Sandner, Philipp G., What is the Effect of the Financial Crisis on Venture Capital Financing? Empirical Evidence from US Internet Start-Ups (April 6, 2009). Venture Capital - An International Journal of Entrepreneurial Finance, Vol. 11, No. 4, pp. 295-309, 2009. Available at SSRN: https://ssrn.com/abstract=1373723 or http://dx.doi.org/10.2139/ssrn.1373723

Jorn Hendrich Block (Contact Author)

University of Trier - Faculty of Management ( email )

D-54296
Germany

Erasmus University Rotterdam (EUR) - Institute of Management (ERIM) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Philipp Sandner

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.philipp-sandner.de

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