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Publications
  • 2020
  • Working Paper
  • HBS Working Paper Series

Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation

By: Sabrina T. Howell, Josh Lerner, Ramana Nanda and Richard Townsend
  • Format:Print
  • | Language:English
  • | Pages:56
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Abstract

Although late-stage venture capital (VC) activity did not change dramatically in the first two months after the COVID-19 pandemic reached the U.S., early-stage VC activity declined by 38%. The particular sensitivity of early-stage VC investment to market conditions—which we show to be common across recessions spanning four decades from 1976 to 2017—raises questions about the pro-cyclicality of VC and its implications for innovation, especially in light of the common narrative that VC is relatively insulated from public markets. We find that the implications for innovation are not benign: innovation conducted by VC-backed firms in recessions is less highly cited, less original, less general, and less closely related to fundamental science. These effects are more pronounced for startups financed by early-stage venture funds. Given the important role that VC plays in financing breakthrough innovations in the economy, our findings have implications for the broader discussion on the nature of innovation across business cycles.

Keywords

Innovation; Recessions; Venture Capital; Innovation And Invention; Patents; Business Cycles; Economic Slowdown And Stagnation

Citation

Howell, Sabrina T., Josh Lerner, Ramana Nanda, and Richard Townsend. "Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation." Harvard Business School Working Paper, No. 20-115, May 2020.
  • SSRN
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About The Authors

Josh Lerner

Entrepreneurial Management
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Ramana Nanda

Entrepreneurial Management
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More from the Authors

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    • Faculty Research

    Biased Sampling of Early Users and the Direction of Startup Innovation

    By: Ruiqing Cao, Rembrand Koning and Ramana Nanda
    • 2020
    • Faculty Research

    Fencing Off Silicon Valley: Cross-Border Venture Capital and Technology Spillovers

    By: Ufuk Akcigit, Sina T. Ates, Josh Lerner, Richard Townsend and Yulia Zhestkova
    • September 2020 (Revised December 2020)
    • Faculty Research

    Impact Investment, Catalytic Capital and Blended Finance

    By: Tarun Khanna, Ramana Nanda, Benjamin N. Roth and Brian Trelstad
More from the Authors
  • Biased Sampling of Early Users and the Direction of Startup Innovation By: Ruiqing Cao, Rembrand Koning and Ramana Nanda
  • Fencing Off Silicon Valley: Cross-Border Venture Capital and Technology Spillovers By: Ufuk Akcigit, Sina T. Ates, Josh Lerner, Richard Townsend and Yulia Zhestkova
  • Impact Investment, Catalytic Capital and Blended Finance By: Tarun Khanna, Ramana Nanda, Benjamin N. Roth and Brian Trelstad
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