The Effect of the Financial Crisis on Venture Capital-backed Firms

The aim of this thesis is to empirically determine the effects of the Financial Crisis on the Venture Capital (VC) industry and its investees. The function of VC firms is assessed by discussing the ‘Coach versus Scout’ debate, and linked to potential selection effects urged by the crisis. The main results, which stem from a variety of regression methods applied to multiple datasets, indicate a clear negative impact of the crisis on VC activity in the United States. I argue that VC firms retreat to their core function, being critical scouting and focused coaching, which results in a smaller selection of firms receiving funding. An extended firm level analysis highlights the success of the core functions of VC, as critically scouted firms show to be eligible for the most common successful exit mechanism used by VCs, being an IPO, after more focused coaching is allowed. Ultimately, concerns are raised about the lasting effects of the crisis on a country’s innovative capacity due to fewer innovative firms having access to smart capital financing needed to fill the early stage funding gap.