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The driving forces of venture capital investments

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Abstract

We have examined the volatility and macroeconomic drivers of venture capital (VC) investments in the past 17 years from 1995 to 2011. We find that VC investments in the United States (US) by the total amount, by the number of deals, and by the average amount per deal are significantly affected by macroeconomic factors and public market signals. The fundamental changes in economic situations (i.e. the 2000 high-tech bubble; the 2008 global financial crisis) had substantial impact on the US VC industry. In response to these dramatic changes, venture firms adjust their risk preferences and investment strategies by securing fewer deals with a smaller average amount per deal in general, increasing their allocations to the expansion and later-stage investments, and injecting a lower percent of cash in the first several financing sequences as opposed to their total committed investments to a company. We also find the impact of 2008 global financial crisis and economic recession on the VC industry is somewhat different from that of the 2000 dot-com bubble.

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Notes

  1. The data is obtained from “Venture Impact: The Economic Importance of Venture Capital-Backed Companies to the US Economy (2009, 5th edition)” provided by IHS Global Insight.

  2. The four stages of venture capital financing are defined and classified by MoneyTree Report. The definitions are described in the third paragraph of Sect. 3 in this study.

  3. We do not add the two variables, industry production and annual CPI, in Model 5 because these two variables are highly correlated to the log value of real GDP, so the additions of the two variables into the model simultaneously would cause the multicollinearity problem.

  4. We added both the macroeconomic variables and market indicators in the same regressions for H1 and H2, but we found VIFs for some variables are as high as 40–80 due to the multicollinearity problem. Panel B of Table 1 shows the significant correlations among some macroeconomic variables and market indicators.

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Acknowledgments

We thank Zoltan Acs and David Audretsch (the Editors), Utz Weitzel (the Associate Editor), and two anonymous reviewers for their helpful comments. We also appreciate the support from the Key Projects “Venture Capital Market and the Growth of Private Firms” of Philosophy and Social Sciences Research for the Ministry of Education of China (No. 05JJD790095), Center for Research of Private Economy and Academy of Financial Research in Zhejiang University.

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Authors and Affiliations

  1. School of Business Administration, University of Houston – Victoria, Sugar Land, TX, 77479, USA

    Yixi Ning

  2. Center for Research of Private Economy, College of Economics, Zhejiang University, Hangzhou, China

    Wei Wang & Bo Yu

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  1. Yixi Ning
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  2. Wei Wang
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Correspondence to Wei Wang.

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Ning, Y., Wang, W. & Yu, B. The driving forces of venture capital investments. Small Bus Econ 44, 315–344 (2015). https://doi.org/10.1007/s11187-014-9591-3

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