The effect of economic policy uncertainty on start-up financing and success: Evidence from the European start-up market

Abstract

This paper investigates the effect of economic policy uncertainty on the financing and success probability of start-ups in the European venture capital market. Specifically, our results show that venture capital investors are less likely to engage in financing activities and start-ups are less likely to have a successful exit under high economic policy uncertainty. Even after controlling for economic uncertainty and industry trends, our results remain stable and significant. However, we highlight the heterogeneity of these effects depending on the venture capital type. We point out the special role of governmental venture capital as it bridges the financing gap for start-ups under high levels of economic policy uncertainty. Still, governmental venture capital investments seem detrimental to a start-up's successful exit probability despite higher economic policy uncertainty. Government policies should be adjusted accordingly, considering the substantial influence of economic policy uncertainty on the start-up market.