Effects of Venture Debt on Early-and Late-Stage Funding in Tech Ecosystems

Purpose: Assessing the effectiveness and efficiency of venture debt in financing in national tech ecosystems. Methodology: We use a Panel VAR approach testing the effect of venture debt on early-and late-funding in a sample of 59 countries. The analysis comprises data from 2015 to 2024. Findings Venture debt enhances the effectiveness and efficiency of the financial system in that it substitutes early-stage investments at a rate of about one-to-four, and increases late-stage investment one-to-two. We interpret this as a reallocation of early-stage capital to late-stage capital, enhancing the success rate of startups. This occurs by weeding out high-risk early-stage companies and accelerating late-stage growth. Practical implications Policymakers must be aware the venture debt is a strong strategic instrument, while these findings also hint at the importance of a diversity in financing instruments for national tech ecosystems. Originality/value This is one of the first studies inquiring into the ecosystem level effects of the venture debt on equity financing.