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

See all articles by Richard R. Townsend

Richard R. Townsend

University of California, San Diego (UCSD) - Rady School of Management

Date Written: October 31, 2014

Abstract

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

Townsend, Richard R., Propagation of Financial Shocks: The Case of Venture Capital (October 31, 2014). Management Science, 2015, 61(11): 2782-2802. Available at SSRN: https://ssrn.com/abstract=2021301 or http://dx.doi.org/10.2139/ssrn.2021301

Richard R. Townsend (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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