Policy Uncertainty and Venture Capital Investment: A Real Options Perspective

Abstract

Recent changes in the global geo-political environment have stimulated a growing interest in policy uncertainty, or uncertainty in future government policies. Whereas policy uncertainty has been shown to impact business activities in many other fields, it has received little attention in strategy surprisingly. This study investigates how policy uncertainty affects venture capital (VC) investment, which is often subject to high uncertainties. Taking a real options perspective, we predict that VCs will defer investment in startups under high levels of policy uncertainty, and that the effect will be strengthened by investment irreversibility. Results based on a large sample of VC- backed startups support our predictions. We contribute by applying real options to examine policy uncertainty and by providing first evidence that such uncertainty dampens VC investment.