Venture Capital Investment Strategies under Financing Constraints: Evidence from the 2008 Financial Crisis

This paper employs the 2008 financial crisis as an empirical setting to examine how investment strategies of venture capitalists (VCs) vary in the presence of a liquidity supply shock, and what the performance implications of these strategies are for their portfolio startups. We show that while, on aggregate, funded startups receive no less financing during the financial crisis than in non-crisis times, VCs allocate relatively more resources to startups operating in the VCs' core sectors. We show that this skew allocation follows from VCs choosing to double down on their core-sector investing, rather than by a changed mix of investors or startups during the financial crisis. These effects are strongest for early-stage startups, for which information problems are most severe. Furthermore, these results are driven by the investment strategies of more-experienced VCs. Building on these findings, we find superior ex post performance among crisis-funded portfolio startups operating in more-experienced VCs' core sectors.