Analysis of factors affecting U.S. Venture Capital Investment 1995–2012

Abstract

In this paper, I examine drivers of start-up fund raising with respect to tax conditions, the strengths of the VC, public equity, and bond industries using a series of fixed effects regressions on data that encapsulate 73,393 investment rounds (deals) in companies and $564 billion in funding over 1995 to 2012. Effects that do not change over time encapsulated within states (such as business friendliness via state policy and hub effects) are lumped into a fixed effect for each state within the model. The fixed effect serves as a proxy for “business friendliness” hold tax rates and market conditions constant. The model finds a strong joint-significance on the fixed effects regressors (p < .0000) meaning that there is a measurable impact of states that contributes outside of the tax and market conditions. The contributions to the literature are a reassessment of models of the effect of taxation on venture capital investment and a ranking of state draw for investment agnostic to taxes and market conditions.