Venture Capital Booms and Start-Up Financing

Abstract

We review the growing literature on the relationship between venture capital (VC) booms and start-up financing, focusing on three broad areas. First, we discuss the drivers of large inflows into the VC asset class, particularly in recent years, which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of VC financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VC investors choose to fund and the terms at which they are funded, independent of investment opportunities—thereby shaping the trajectory of innovation being conducted by start-ups. Third, an important insight from recent research is that booms in VC financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the United States over the past 40 years in just two broad areas—information and communication technologies and biotechnology. We conclude by highlighting promising areas of further research.