Liquidity, Technological Opportunities and the Stage Distribution of Venture Capital Investments

Abstract

This paper explores the determinants of the stage distribution of European venture capital investments from 1990 to 2011. Consistent with liquidity risk theory, we show that the likelihood of investing in earlier stages increases relative to all private equity investments during liquidity crisis years. While liquidity is the main driver of acquisition investments and to some extent of expansion financings, technological opportunities are overall the main driver of early and late stage venture capital investments. In contrast to the dotcom crash, the recent financial crisis negatively affected the relative likelihood of expansion investments, but not of early and late stage investments.

Keywords: Venture capital, liquidity risk, technological opportunities, financial crisis

JEL Classification: G24, O16, O52, F30