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

Sabrina Howell (), Josh Lerner (), Ramana Nanda () and Richard Townsend ()
Additional contact information
Sabrina Howell: New York University
Josh Lerner: Harvard Business School, Entrepreneurial Management Unit
Richard Townsend: University of California, San Diego

No 20-115, Harvard Business School Working Papers from Harvard Business School

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.

Keywords: Venture Capital; Innovation; Patents; Business Cycles; Recessions (search for similar items in EconPapers)
JEL-codes: G24 O31 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-05
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-ino, nep-pay and nep-sbm
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