Fear of the unknown - The effect of economic policy uncertainty on start-up financing and success

Abstract

This paper investigates the effect of economic policy uncertainty on the financing and success probability of start-ups in the European venture capital market. Specifically, our results show that venture capital investors are less likely to engage in financing activities and start-ups are less likely to have a successful exit under high economic policy uncertainty. Even after controlling for economic uncertainty and industry trends, our results remain stable and significant, highlighting the importance of uncertainty surrounding government policies. However, we point out the special role of governmental venture capital as it bridges the financing gap for start-ups under high levels of economic policy uncertainty. Besides, governments seem to be better investors facing higher uncertainty leading to crucial implications for government policies.