How Does Policy Uncertainty Affect Venture Capital?

Using a newly developed policy uncertainty index, we find that policy uncertainty is negatively related to venture capital (VC)'s investment propensity. VCs, however, adjust their investment strategy quickly in response to policy uncertainty changes. Relying on plausibly exogenous variation generated by gubernatorial elections, we show that the relation is likely causal. The negative effect is more pronounced when startups are less mature, have fewer tangible assets, are more dependent on government spending, and are exposed to severer holdup from entrepreneurs. Policy uncertainty also adversely affects VCs' investment outcomes. In response, VCs stage finance more and cut total investment amount