Venture Capital and Startup Agglomeration

Jun Chen and Michael Ewens

Journal of Finance, 2025, vol. 80, issue 4, 2153-2198

Abstract: This paper examines venture capital's (VC) role in the geographic clustering of high‐growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one‐standard‐deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow‐on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.

Date: 2025
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https://doi.org/10.1111/jofi.13451

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:80:y:2025:i:4:p:2153-2198

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