Propagation of Financial Shocks: The Case of Venture Capital
Management Science, 2015, 61(11): 2782-2802
43 Pages Posted: 14 Mar 2012 Last revised: 16 Dec 2015
Date Written: October 31, 2014
This paper investigates how venture-backed companies are affected when others sharing the same investor suffer a negative shock. In theory, companies may be helped or hurt in this scenario. To examine the topic empirically, I estimate the impact of the collapse of the technology bubble on non-information-technology (non-IT) companies that were held alongside internet companies in venture portfolios. Using a difference-in-differences framework, I find that the end of the bubble was associated with a significantly larger decline in the probability of raising continuation financing for these non-IT companies in comparison to others. This does not appear to be driven by unobservable company characteristics such as company quality or IT-relatedness; for the same portfolio company receiving capital from multiple venture firms, investors with greater internet exposure were significantly less likely to continue participating in follow-on rounds.
Keywords: Intermediation, Contagion, Venture Capital, Technology Bubble, Internet, Lock-in
JEL Classification: G11, G24
Suggested Citation: Suggested Citation