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Faculty of Economics

A University of Cambridge academic at the Faculty of Economics has researched the relationship between venture capital booms and startups. William Janeway has examined the way they are related to but also distinct from macroeconomic business cycles and stock market fluctuations.


William H. Janeway

“Venture-backed firms constitute nearly half of IPOs in the United States,” says William ‘Bill’ Janeway CBE, an American venture capitalist and economist. “The degree to which VCs select different startups across each cycle, as well as how they structure their contracts and govern differently can impact not just the rate, but also the trajectory of technological innovation broadly, given the industry’s outsized role in financing innovative high growth ventures.”

Venture capital is associated with some of the most innovative and high-growth companies in the economy. “The boom over the past forty years has seen it grow from a cottage industry to a prominent asset class,” says Bill Janeway. Now it annually deploys around $300 billion dollars worldwide.

In the paper ‘Venture Capital Booms and Startup Financing’ William Janeway, Ramana Nanda from Harvard Business School and Matthew Rhodes-Kropf from Massachusetts Institute of Technology review the growing literature on venture capital, focusing on the drivers of large inflows into the venture capital asset class, particularly in recent years -- which are related to but also distinct from macroeconomic business cycles and stock market fluctuations.

The paper also explores the emerging literature on the real effects of venture capital financing booms, especially the potential impact that booms (and busts) can have on the types of firms that VCs choose to fund and the terms at which they are funded, independent of investment.

“Perhaps the most salient channel driving booms in VC and startup financing is the arrival of new technologies and the deployment of risk capital to commercialize these,” Janeway said. “Beyond technological revolutions, public markets play an important role in providing signals of investment opportunities to venture capital investors. IPO markets themselves have been shown to be highly cyclical, with the number of new issues being clustered in certain periods of time. “Research has shown that ventures funded during periods of “hot markets” tend to be higher risk, that is more fail, but the survivors win bigger,” Janeway noted.

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An important insight from recent research is that booms in venture capital financing are not just a temporal phenomenon but can also be seen in the concentration of VC investment in certain industries and geographies. “We also review the role of government policy,” Janeway said, “exploring the degree to which it can explain the concentration of VC funding in the US over the past forty years in just two broad areas – information and communication technologies (ICT) and biotechnology.”

Recent research documents a decline in the science component of corporate R&D spending as well as declining federal funding of R&D in percentage terms. The question arises whether venture capital, as it has grown in scale, can play a direct role in financing a broader scope of fundamental technological innovations as it has in biotechnology.

“Perhaps the most urgent issue today is what role venture capital can play in responding to climate change, a challenge as important as the national security issues of World war II and the Cold War” Janeway asked. “Can government play the same sort of complementary roles that it did in the digital and biotech revolutions, both funding upstream science and serving as a collaborative first customer for the needed “green” technologies, such as radically enhanced energy storage?”

Bill Janeway is a co-founder and member of the board of governors of the Institute for New Economic Thinking. The new Weslie and William Janeway Institute for Economics will be launched at the Faculty of Economics in October.

The full paper is available at:



Venture Capital