Effects of venture debt on early- and late-stage funding of tech startups in tech ecosystems

Venture debt has emerged as a critical yet understudied component of entrepreneurial finance in tech startup ecosystems. This paper investigates how the availability of venture debt influences the allocation of equity funding between early- and late-stage technological startups across 59 countries from 2015 to 2024, from which venture debt data are sparse, with robust series available for only 15 countries. Using a Panel Vector Autoregression (PVAR) framework, we examine dynamic inter-dependencies between funding instruments while controlling for national-level knowledge intensity, economic development, and political stability. Our findings reveal a consistent substitution effect: increased venture debt availability is associated with reduced early-stage equity funding, but enhance late-stage investments. The aggregate effect is positive in all the models suggesting that venture debt contributes to the effectiveness and efficiency of finance in the tech start-up ecosystems. The apparent redistribution of capital across the startup lifecycle, potentially accelerates scale-up trajectories while offering a more efficient funding mode for early-stage companies. These dynamics have important implications for innovation policy, especially in ecosystems seeking to balance risk-sharing, capital efficiency, and sustained entrepreneurial support. We argue that venture debt should not be treated as a passive supplement to equity, but as a strategic financial tool whose design and regulation can reshape innovation pathways.