Is there an adverse effect of uncertainty on Venture Capital? The European evidence

Abstract

Early-stage and, to a lesser degree, expansion Venture Capital (VC) investment exhibits evident irreversibility characteristics and, according to the irreversibility-delay theory of investment, should thus be sensitive to real and financial uncertainty. The objective of this article is to examine to what extent VC investment is adversely affected by macroeconomic uncertainty on the basis of a European dataset from 1995 to 2005. Our results indicate that price uncertainty and interest rate volatility do not significantly affect European VC finance and that only growth and cost of capital considerations seem to matter.

Acknowledgements

We thank Ms. Jennifer Vandermosten and the European Venture Capital Organization (EVCA) for making available to us their European VC database, and Pr. A. Episcopos for his comments. This research project is co-financed by the EU – European Social Fund (75%) and the Greek Ministry of Development – General Secretariat of Research and Technology (25%).