Venture capital is private equity capital for financing early-stage, high-growth startups. In past decades, venture capital investments have exploded worldwide, and the venture-backed business has emerged as a driving force of global technological innovations, economic growth and employment in many countries.
As a leader in the global venture capital community, the U.S. has a well-developed system and market to support venture capital activities. The venture industry in the U.S. has been largely driven by private sectors, while the rise of venture industry in other countries (e.g. China) receives strong support from their public sectors. Many big-name companies, such as Google, Facebook, Twitter, Uber, Lyft, Zoom, Pinterest, etc., have received funds from venture capitalists during their early stages. Among them, Uber, Lyft, Zoom and Pinterest have just filed initial public offering on the stock market and raised billions of dollars.
According to an article published in Small Business Economics by Ning et al. in 2015, the venture capital industry was adversely affected by the 2000 tech bubble and 2008 financial crisis. U.S. venture capital investments measured by the total amount of VC investments and the number of deals peaked in 2000 but declined substantially in the subsequent three years, rebounded slowly from 2004 to 2007 and dropped again in 2008 due to the global financial crisis.
Generally, an expanding economy and a booming financial market have a positive impact on the venture capital industry, characterized by a larger amount of investments, a greater number of deals and a higher average financing amount per deal. Also, venture capitalists become more cautious and risk-averse after financial market meltdown, such as the famous 2000 dot-com bubble and 2008 financial crisis. The fundamental changes in the macroeconomic conditions have forced venture capitalists to adjust their risk management and investment strategies by investing less funds in fewer deals, shifting a larger proportion of their money and deals to later-stage companies and injecting a lower proportion of cash in the first several financing sequences as opposed to their overall committed venture funds. However, the impact of the 2008 financial crisis on the venture industry was less dramatic than that of the 2000 high-tech crash.
These findings have useful implications for both venture capitalists and startup companies that are seeking venture financing in practice. Venture capitalists can take appropriate steps to adjust their risk and investment strategies in response to macroeconomic and public market conditions. For the companies seeking venture financing, the best time to secure a deal with a large amount of financing is the time when the public market is moving upward and the key economic indicators are in the expanding mode.