The Effect of Policy Uncertainty on VC Investments Around the World

This study documents a significant negative relationship between policy uncertainty and venture capital (VC) investment in startups across emerging venture capital markets (i.e., outside the United States). The adverse effect of policy uncertainty is exacerbated for younger and early-stage startups. By contrast, the effect is attenuated for startups that have headquarters in cities with a high concentration of global VC investment, in countries with more developed stock markets, or if the VC is led by a bank or a corporate entity. Using close national elections and term limits to alleviate endogeneity concerns, we find that the baseline results continue to hold. Furthermore, we also find that policy uncertainty reduces the amount of cross-border VC investment. Finally, this study provides evidence that uncertainty increases the number of financing rounds, decreases the fraction of investment amount during the first round, and reduces the likelihood of successful exit through acquisition.