The driving forces of Venture Capital funding in Sweden - A longitudinal study of the determinants and principal components of Venture Capital funding in Sweden from 2001 to 2020

Abstract

This thesis analyses the driving forces of Venture Capital (VC) funding in Sweden over the years 2001 - 2020. The driving forces of VC funding is an essential piece in understanding how well the Swedish VC industry works and fulfills its purpose in the economy. This knowledge is missing in the literature. The main novelty of this research is the multifaceted investigation of the determinants, economic crises and overarching effects which might affect VC funding in Sweden. The dataset investigated consists of 10 different determinants in the form of economic variables from different institutional environments and four dependent variables in composite-source measures for each of the VC funding investment stages (Total, Seed, Startup and Expansion funding). This data is analyzed using OLS regression models and the dimensionality-reduction technique Principal Component Analysis (PCA); a novel application for investigating the Swedish VC industry. The results show that VC funding was affected positively by the positive development of the stock market, higher interest rates and larger spending on research and development (R&D) but negatively affected by more patent applications and a higher level of labor market rigidity. The regression results vary heavily between different investment stages and the effects of IPO activity and corporate tax rate could surprisingly not be established in any stage. It is also concluded that the economic crises of the period drastically harmed the amount of VC funding. From the PCA, the two components “Investor focus on VC and Innovation” and “State of the Financial Market” were significant in explaining VC funding which confirms the existence of cohesive effects in the economy capable of providing better ground for future research around the true drivers of VC funding in Sweden.