Abstract

This article studies the development of the venture capital (VC) industry in the United States and assesses how VC financing affects firm innovation and growth. The results highlight the essential role of VC financing for U.S. innovation and growth and suggest that VC development in other countries could promote their economic growth.

Jeremy Greenwood is a professor of economics at the University of Pennsylvania. Pengfei Han is an assistant professor of finance at Guanghua School of Management at Peking University. Juan M. Sánchez is a vice president and economist at the Federal Reserve Bank St. Louis. We thank Ana Maria Santacreu for helpful comments.

INTRODUCTION

Venture capital (VC) is a particular type of private equity that focuses on investing in young companies with high-growth potential. The companies and products and services VC helped develop are ubiquitous in our daily lives: the Apple iPhone, Google Search, Amazon, Facebook and Twitter, Starbucks, Uber, Tesla electric vehicles, Airbnb, Instacart, and the Moderna COVID-19 vaccine. Although these companies operate in drastically different industries and with dramatically different business models, they share one common and crucial footprint in their corporate histories: All of them received major financing and mentorship support from VC investors in the early stages of their development.

This article outlines the history of VC and characterizes some stylized facts about VC's impact on innovation and growth. In particular, this article empirically evaluates the relationship between VC, firm growth, and innovation.

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