Venture Capital Cycles: Empirical Evidence from the USA

Abstract

Due to their high innovative ability and flexibility, young technology ventures facilitate structural change in the economy. This results in the creation of new jobs and the opening up of new sectors. In this context, venture capital companies play a central role by providing new firms with the required funds. However, the objective of venture capital investments is more than simply making venture capital available. Venture capitalists also help businesses to develop their management team, and enter into a temporary strategic partnership with the capital acquirer by taking seats on the board of the company. Venture capital financing represents a typical time-limited minority stake that is executed in iterative stages.

The innovative thrust of this study is not only to identify significant cyclical patterns in the US venture capital market but also to ascertain the length of economic cycles, an aspect often neglected in previous studies. By way of contrast, the research shows that both the ARIMA technique and spectral analysis capture short-term fluctuations of between two and three quarters, corresponding to cycle length as identified by Gehrig and Stenbacka (2004) during the stage of project selection. The second cycle of 7.69 quarters located in this study is associated with the theory of the full investment process, which involves a period of between two and seven years. Overall, there is evidence that the US venture capital market constitutes a fully developed market with cyclical properties. Thus, it is expected that the current market consolidation will once again increase in intensity. In addition, venture capital investments are investigated for a range of different industries, with contradictory results. While one low and one high cycle dominates the time series for some sectors, stable cycles occurred more often in other industries. (JEL C22, E32, E44, G24)