Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation

55 Pages Posted: 18 May 2020 Last revised: 22 May 2020

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Ramana Nanda

Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Richard Townsend

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

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Date Written: May 2020

Abstract

Although late-stage venture capital (VC) activity did not change dramatically in the first two months after the COVID-19 pandemic reached the U.S., early-stage VC activity declined by 38%. The particular sensitivity of early-stage VC investment to market conditions—which we show to be common across recessions spanning four decades from 1976 to 2017—raises questions about the pro-cyclicality of VC and its implications for innovation, especially in light of the common narrative that VC is relatively insulated from public markets. We find that the implications for innovation are not benign: innovation conducted by VC-backed firms in recessions is less highly cited, less original, less general, and less closely related to fundamental science. These effects are more pronounced for startups financed by early-stage venture funds. Given the important role that VC plays in financing breakthrough innovations in the economy, our findings have implications for the broader discussion on the nature of innovation across business cycles

Suggested Citation

Howell, Sabrina T and Lerner, Josh and Nanda, Ramana and Townsend, Richard, Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation (May 2020). NBER Working Paper No. w27150, Available at SSRN: https://ssrn.com/abstract=3603780

Sabrina T Howell (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Josh Lerner

Harvard Business School - Finance Unit ( email )

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HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

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United States

National Bureau of Economic Research (NBER)

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Ramana Nanda

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Richard Townsend

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

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Rady School of Management
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United States

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