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How Does Policy Uncertainty Affect Venture Capital?

58 Pages Posted: 3 Feb 2017 Last revised: 4 Sep 2017

Xuan Tian

Tsinghua University - PBC School of Finance

Kailei Ye

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: August 16, 2017

Abstract

How does policy uncertainty affect venture capital (VC) investment and exit outcomes? Using a newly developed policy uncertainty index, we find that increased policy uncertainty is associated with lower VC propensity to investment. VCs, however, adjust their investment strategy quickly in response to policy uncertainty changes. The relation is more pronounced when startups are riskier, i.e., when they are less mature, have fewer tangible assets, are more dependent on government spending, and are exposed to more severe entrepreneur holdup. We further show that policy uncertainty adversely affects VCs’ investment outcomes. VCs rely on stage financing, syndication with other VCs, and reduced investment amount to mitigate the negative effect of policy uncertainty. Our paper sheds new light on how policy uncertainty affects a previously ignored but important market – the venture capital market.

Keywords: Venture Capital, Policy Uncertainty, Investment, Exit Outcomes

Suggested Citation

Tian, Xuan and Ye, Kailei, How Does Policy Uncertainty Affect Venture Capital? (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=2910075 or http://dx.doi.org/10.2139/ssrn.2910075

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Kailei Ye

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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