Venture Capital Decision Making Following the Burst of the Dot.com Bubble

Abstract

This paper investigates changes in venture capital investing behavior around the dot.com bubble and its subsequent crash in March of 2000. Through various difference in difference models, it estimates the relationship between a fund’s pre-crash tech exposure and its effect on multiple post-crash outcomes. While this paper finds that there was no significant effect between a fund’s pre-crash tech exposure and a portfolio company’s ability to raise capital or exit, it does find that there was a significant effect between a fund’s pre-crash tech exposure and the following, post-crash, 1) a portfolio company raising a later stage round’s ability to raise capital, 2) firms’ ability to raise follow-on rounds of funding, 3) IT firm’s ability to raise follow-on rounds of funding, and 4) how many rounds the VC participated in. Ultimately, it was revealed that, post-crash, Tech VCs began to participate in more rounds, follow-on rounds, and more specifically, their non-IT portfolio companies’ follow-on rounds, proving that Tech VC funds rotated out of tech and into non-IT investments in response to the tech crash.