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What is the Effect of the Current Financial Crisis on Venture Capital Financing? Empirical Evidence from US Internet Start-ups

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  • Block, Joern
  • Sandner, Philipp

Abstract

Employing a large dataset regarding venture capital investments in US Internet firms, we analyze the effect of the current financial crisis on the venture capital market. Using regression analysis, we find that the financial crisis led to 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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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14727.

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Date of creation: 21 Apr 2009
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Handle: RePEc:pra:mprapa:14727

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Keywords: Entrepreneurship; Financial Crisis; Venture Capital; Innovation Finance;

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  1. Florida, Richard L. & Kenney, Martin, 1988. "Venture capital-financed innovation and technological change in the USA," Research Policy, Elsevier, Elsevier, vol. 17(3), pages 119-137, June.
  2. David Audretsch & Roy Thurik, 0000. "Sources of Growth," Tinbergen Institute Discussion Papers 97-109/3, Tinbergen Institute.
  3. Christian Keuschnigg, 2002. "Venture Capital Backed Growth," University of St. Gallen Department of Economics working paper series 2002, Department of Economics, University of St. Gallen 2002-04, Department of Economics, University of St. Gallen.
  4. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(4), pages 143-156, Fall.
  5. Timmons, Jeffry A. & Bygrave, William D., 1986. "Venture capital's role in financing innovation for economic growth," Journal of Business Venturing, Elsevier, vol. 1(2), pages 161-176.
  6. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 47(3), pages 243-277, March.
  7. Laura Bottazzi & Marco Da Rin, 2002. "Venture capital in Europe and the financing of innovative companies," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 17(34), pages 229-270, 04.
  8. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 33-50, January.
  9. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
  10. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, StataCorp LP, vol. 2(4), pages 358-377, November.
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Cited by:
  1. Block, Joern & Sandner, Philipp & De Vries, Geertjan, 2010. "Venture capital and the financial crisis: an empirical study across industries and countries," MPRA Paper 20287, University Library of Munich, Germany.
  2. Aleksandar Bradic, 2012. "The Role of Social Feedback in Financing of Technology Ventures," Papers 1301.2196, arXiv.org.
  3. Dorsman, André & Gounopoulos, Dimitrios, 2013. "European Sovereign Debt Crisis and the performance of Dutch IPOs," International Review of Financial Analysis, Elsevier, Elsevier, vol. 30(C), pages 308-319.

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