Economic Downturn and Financing Innovative Startup Firms

Abstract

How does economic downturn affect the financing of young innovative startup firms? In the context of venture capital firms financing innovative firms during economic downturns, we hypothesize that the decision to finance young innovative firms depends largely on the nature of the economic downturn. Specifically, we hypothesize that venture capital firms are less likely to invest in early-stage innovative firms during an economic downturn that is directly related to the technology sector, and are more likely to invest in early-stage innovative firms during an economic downturn that is not directly related to the technology sector. This is mainly because venture capital fundraising activity decreases during economic downturns, which makes venture capital firms shift investments between early-stage startup companies and later-stage startup companies depending on the situation of the public equity market. Our empirical analyses support our hypotheses. This study contributes to the entrepreneurship literature ...