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Venture Capital Booms and Start-Up Financing

Author

Listed:
  • William H. Janeway

    (Department of Economics, Cambridge University, Cambridge CV3 9DD, United Kingdom)

  • Ramana Nanda

    (Department of Finance, Imperial College, London SW7 2AZ, United Kingdom)

  • Matthew Rhodes-Kropf

    (Department of Finance, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139, USA)

Abstract

We review the growing literature on the relationship between venture capital (VC) booms and start-up financing, focusing on three broad areas. First, we discuss the drivers of large inflows into the VC asset class, particularly in recent years, which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of VC financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VC investors choose to fund and the terms at which they are funded, independent of investment opportunities--thereby shaping the trajectory of innovation being conducted by start-ups. Third, an important insight from recent research is that booms in VC financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the United States over the past 40 years in just two broad areas--information and communication technologies and biotechnology. We conclude by highlighting promising areas of further research.

Suggested Citation

  • William H. Janeway & Ramana Nanda & Matthew Rhodes-Kropf, 2021. "Venture Capital Booms and Start-Up Financing," Annual Review of Financial Economics, Annual Reviews, vol. 13(1), pages 111-127, November.
    • Handle: RePEc:anr:refeco:v:13:y:2021:p:111-127
    DOI: 10.1146/annurev-financial-010621-115801
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    Cited by:

    1. Silvia Dalla Fontana & Ramana Nanda, 2023. "Innovating to Net Zero: Can Venture Capital and Start-Ups Play a Meaningful Role?," Entrepreneurship and Innovation Policy and the Economy, University of Chicago Press, vol. 2(1), pages 79-105.
    2. Jiang Du & Jing Li & Bingqing Liang & Zhenjun Yan, 2025. "Optimizing Sustainable Entrepreneurial Ecosystems: The Role of Government-Certified Incubators in Early-Stage Financing," Sustainability, MDPI, vol. 17(9), pages 1-22, April.
    3. Ramana Nanda, "undated". "Priors, Experiments, Learning and Persuasion in (Bayesian) Entrepreneurial Finance," Harvard Business School Working Papers 25-020, Harvard Business School.
    4. Du, Qianqian & Hellmann, Thomas, 2024. "Getting tired of your friends: The dynamics of venture capital relationships," Journal of Financial Intermediation, Elsevier, vol. 58(C).
    5. Hager, Sandy Brian, 2025. "The Shifting Fortunes of Corporate Psychedelia," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 1-23.

    More about this item

    Keywords

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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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