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What is the effect of the financial crisis on venture capital financing? Empirical evidence from US Internet start-ups

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  • Joern Block
  • Philipp Sandner

Abstract

Employing a large dataset of venture capital investments in US Internet firms, we analyse the effect of the current financial crisis on the venture capital market. Using regression analysis, we find that the financial crisis is associated with a 20% decrease in the average amount of funds raised per funding round. This effect, however, can only be found in later funding rounds. We argue that firms in later financing rounds that need capital to survive cannot avoid a deduction induced by the financial crisis, whereas firms that seek initial funding postpone their funding and expansion plans until the capital markets have stabilized. Furthermore, firms in later phases of the venture cycle are more likely to be negatively affected by the weak IPO market than firms seeking initial funding. Our results suggest that the financial crisis can lead to a severe ‘funding gap’ in the financing of technological development and innovation.

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File URL: http://hdl.handle.net/10.1080/13691060903184803
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Venture Capital.

Volume (Year): 11 (2009)
Issue (Month): 4 (June)
Pages: 295-309

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Handle: RePEc:taf:veecee:v:11:y:2009:i:4:p:295-309

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Cited by:
  1. Alexy, O.T. & Block, J.H. & Sandner, P.G. & Ter Wal, A.L.J., 2010. "The Social Capital of Venture Capitalists and Its Impact on the Funding of Start-Up Firms," ERIM Report Series Research in Management ERS-2010-028-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  2. Block, Joern H. & De Vries, Geertjan & Schumann, Jan H. & Sandner, Philipp, 2014. "Trademarks and venture capital valuation," Journal of Business Venturing, Elsevier, vol. 29(4), pages 525-542.
  3. Block, Joern H. & Jaskiewicz, Peter & Miller, Danny, 2011. "Ownership versus management effects on performance in family and founder companies: A Bayesian reconciliation," Journal of Family Business Strategy, Elsevier, vol. 2(4), pages 232-245.
  4. Oliver Alexy & Joern Block & Philipp Sandner & Anne Ter Wal, 2012. "Social capital of venture capitalists and start-up funding," Small Business Economics, Springer, vol. 39(4), pages 835-851, November.

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