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

Joern Block and Philipp Sandner

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Entrepreneurship; Financial Crisis; Venture Capital; Innovation Finance (search for similar items in EconPapers)
JEL-codes: G24 L26 O30 (search for similar items in EconPapers)
Date: 2009-04-21
New Economics Papers: this item is included in nep-ent and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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