On the upside or flipside: Where is venture capital positioned in the era of digital disruptions?

Abstract

Recent studies have found that disruptive technologies, such as FinTech, have the potential to overturn existing business models and overthrow incumbents. These studies have demonstrated that newly emerging digital platforms financing early-stage ventures threaten traditional venture capital (VC). We argue that, conversely, VC benefits from advances in information and communication technology (ICT), as ICT fosters entrepreneurship and mitigates agency issues in VC deals. This paper examines the impact of digitization on VC investments from 23 European countries spanning 2007–2019 using a dynamic panel two-step system generalized method of moments (GMM) estimation technique. The results show that the factors “ICT penetration” (a general measure of societal internet and computer access and use) and “digital economy” (a measure of ICT-powered economic activity) exert significant and positive effects on early-stage, later-stage, and total VC investments. Moreover, availability of bank credit moderates the effect of digital economy on VC investment. Finally, this study reveals that it is digital entrepreneurship (as reflected in our “digital economy” measure), and not total entrepreneurial activity, that attracts VC investment. We conclude that the VC industry is aligned with rather than threatened by the newly emerging digital environment. The empirical results are robust to different control variables and data sources. This paper offers useful implications for policy and contributes to the literature on digital entrepreneurship and venture capital.