Early-Stage Versus Later-Stage Investments and The Economic Cycle, An Empirical Research On The UK's Venture Capital Industry

Masters Programmes
Dissertation Cover Sheet
Title: Early-stage versus later-stage investments and the

economic cycle, an empirical research on the UK’s
venture capital industry
Degree Course: DLMBA
Student Name: Mohammad As’ad, CFA
Dissertation Date: 14 March 2023
Word Count: 12,494
Number of Pages: 43
“I declare that this work is entirely my own in accordance with the University’s Regulation 11 and the WBS
guidelines on plagiarism and collusion. All external references and sources are clearly acknowledged and identified
within the contents.
No substantial part(s) of the work submitted here has also been submitted by me in other assessments for
accredited courses of study, and I acknowledge that if this has been done it may result in me being reported for
self-plagiarism and an appropriate reduction in marks may be made when marking this piece of work.”
Acknowledgements
I want to express my appreciation to the following individuals and organizations without whom
this dissertation would not have been possible. First, I am grateful to my dissertation advisor,
Dr Christos Kolympiris, for his support, guidance, and encouragement. His expertise, insight,
and feedback have been invaluable in shaping my research and helping me navigate the
challenges during my research journey.
I would also like to extend my gratitude to the faculty members of the DLMBA Program at
Warwick Business School, who have provided me with a stimulating academic environment
to pursue my dissertation.
My thanks also go to the dissertation’s interview participants. To Mr Lucius Cary, I am grateful

for your willingness to share your time and insights. Your input has been invaluable in shaping
the findings of my research. I am also thankful for the generosity and cooperation of the other
participants who chose to be anonymous. I hope this dissertation will contribute to a better
understanding of your perspectives and experiences.
Lastly and most importantly, I am indebted to my wife, Kristina, and my daughter, Yara, who
provided me with emotional support and encouragement throughout this journey. Their strong
belief in me and my abilities has been a constant source of motivation.
Thank you all for your contributions, encouragement, and support. I could not have done this
without you.
i
Abstract
This dissertation examines the performance of early-stage venture capital (VC) investments
compared to later-stage investments in the United Kingdom (UK) between 2005 and 2015.
The research analysed data from a sample of 2,755 early- and later-stage VC deals and
compared the performance of early- and later-stage VC deals based on their performance
ranking. The current industry insights collected from interviewed VC practitioners for this
research further strengthened its analysis and findings. This dissertation finds that, contrary
to the recent literature, the UK’s early-stage VC investments did not outperform later-stage
investments during the analysed period. However, this research also finds that early-stage VC
deals completed during the 2008-2009 financial crisis performed better than those completed
in other periods, which is interesting, as one might expect early-stage investments to be riskier
and underperform during a crisis. These findings have important implications for VC investors,
practitioners, early-stage businesses and policymakers as they suggest that different
economic conditions may impact the performance of VC investments differently.
Keywords:
Venture capital
Early-stage
Later-stage
Performance
Economic downturn
Recession
ii
Table of Contents
Acknowledgements ................................................................................................................................................ i
Abstract ................................................................................................................................................................. ii
Table of Contents ..................................................................................................................................................iii
List of Figures and Tables .................................................................................................................................... iv
List of Abbreviations .............................................................................................................................................. v
Glossary ............................................................................................................................................................... vi
1. Introduction ............................................................................................................................................... 1
2. Literature Review ...................................................................................................................................... 4
2.1. Literature review purpose ............................................................................................................. 4
2.2. The business cycle and funding stages........................................................................................ 5
2.3. How VC works .............................................................................................................................. 6
2.4. Risk and return in the VC context ................................................................................................. 7
2.5. Strategies, performance, and the economic cycle ........................................................................ 9
3. Research Hypotheses............................................................................................................................. 12
4. Methodologies and Limitations ............................................................................................................... 14
4.1. Data collection methodology ...................................................................................................... 14
4.2. Analysis methodology ................................................................................................................ 16
4.3. Evaluation and limitations ........................................................................................................... 17
5. Research Data ........................................................................................................................................ 19
5.1. Sample description ..................................................................................................................... 19
5.2. Primary variables........................................................................................................................ 21
5.3. Control variables ........................................................................................................................ 22
5.4. Descriptive statistics ................................................................................................................... 23
5.5. Qualitative data .......................................................................................................................... 24
6. Analysis and Results............................................................................................................................... 26
6.1. IRR: early- versus later-stage ..................................................................................................... 26
6.2. Ranking: early- versus later-stage .............................................................................................. 27
6.3. Early-stage VC deals during a recession ................................................................................... 29
7. Discussion .............................................................................................................................................. 32
7.1. Summary of the findings ............................................................................................................. 32
7.2. Findings versus the literature ..................................................................................................... 33
7.3. Findings versus the qualitative data ........................................................................................... 34
7.4. Dissertation’s contribution .......................................................................................................... 35
8. Conclusion .............................................................................................................................................. 37
8.1. Implications ................................................................................................................................ 37
8.2. Limitations and future research .................................................................................................. 37
8.3. Last remarks............................................................................................................................... 38
References .......................................................................................................................................................... 39
Appendix 1: Ranking of Referenced Journals ..................................................................................................... 43
iii
List of Figures and Tables
Figure 1: Business funding life cycle ...................................................................................................................... 5

Figure 2: The UK’s quarterly real GDP adjusted for seasonality (Q1-2005 to Q4-2014) ...................................... 19
Figure 3: Quarterly volume and value of the UK’s VC deals (Q1-2005 to Q4-2014) ............................................ 20
Figure 4: Exits breakdown of the sampled deals .................................................................................................. 21
Table 1: VC target returns across the different financing stages ............................................................................ 8

Table 2: Description of the research variables ..................................................................................................... 22
Table 3: Descriptive statistics of IRR, log (IRR+1), ranking, stage, GDP, and industry ........................................ 23
Table 4: Spearman correlations of IRR, log (IRR+1), ranking, stage, GDP, and industry .................................... 23
Table 5: t-test of log (IRR+1), early-stage versus later-stage ............................................................................... 26
Table 6: OLR model results for H1: ranking versus stage, GDP, and industry ..................................................... 28
Table 7: OLR model results for H2: ranking versus GDP and industry ................................................................. 30
Table 8: Ranking of the journals referenced in this research ................................................................................ 43
iv
List of Abbreviations
Abbreviation Meaning
ABS Association of Business Schools
AJG Academic Journal Guide
B2B Business-to-business
B2C Business-to-consumer
CABS Chartered Association of Business Schools
CAGR Compound annual growth rate
CI Confidence interval
Coeff Coefficient
DF Degrees of freedom
EIS Enterprise Investment Scheme
FFF Friends, family, and fools
GDP Gross domestic product
H1 First hypothesis
H2 Second hypothesis
IMF International Monetary Fund
IPO Initial public offering
IRR Internal rate of return
IT Information technology
LBO Leverage buyout
Log Logarithm
LP Limited partner
LR Likelihood ratio
M&A Mergers and acquisitions
MBO Management buyout
OECD Organisation for Economic Co-operation and Development
OLR Ordinal logistic regression
P Probability
PE Private Equity
Q Quarter
QoQ Quarter on quarter
SE Standard error
SEIS Seed Enterprise Investment Scheme
St Dev Standard deviation
Z Z-score
v
Glossary
Term Definition
Buyout Funding through leveraging a business by either its management or investors to acquire its
assets or product lines (1)
Categorical Includes nominal variable and ordinal variable and is a categorization of observations into
variable discrete groupings, such as the industrial sectors of the VC deals in the research sample (2)
Dummy variable A coded categorical variable indicates the presence of an attribute or membership in a
particular category; it could be binary (coded by 0,1) for two categories or comprehensively
represent the categorical information for more than two categories by coding (j – 1)
variables (2)
Early-stage Funding a business that completed product development to start commercial operations.
Businesses at this stage typically do not report any profit (1)
Internal rate of Is the discounting rate that makes the net present value of an investment’s cash flow equal
return to zero
Kurtosis A descriptive statistic measures a distribution’s peakedness, the relationship between its
tails, and its most numerous values. It is commonly used together with the skewness to
screen data for normal distribution. Kurtosis should fall in the range from +2 to -2 to consider
the data normally distributed (2)
Later-stage Funding the expansion or growth of a business by enhancing its capacity, market and
products/services and, in some cases, its working capital. Businesses at this stage typically
break even or report an operational profit (1)
Limited partner An institutional investor, such as a pension fund, endowment, bank, or insurance company,
has the rights as a partner but forgoes control in exchange for limited liability (1)
Ordinal logistic A statistical procedure relates one or more independent variables, whether continuous or
regression categorical, to an ordinal response (dependent) variable. OLR is used to test H1 and H2 in
this research (3)
(3)
Ordinal variable A categorical variable with an explicit ordering of the category levels
Recession “A significant decline in economic activity spread across the economy, lasting more than a
few months, normally visible in real gross domestic product, real income, employment,
industrial production, and wholesale-retail sales” (4)
Seed stage Funding a business to research, assess and develop an initial concept before reaching the
next start-up stage (1)
Skewness A descriptive statistic measures a distribution’s symmetry. It is commonly used together with
kurtosis to screen data for normal distribution. Skewness should fall in the range
from +2 to -2 to consider the data normally distributed (2)
Start-up Funding a business to develop its product and initiate its marketing. Businesses being set
up during this stage typically did not start commercial operations (1)
t-test A nonparametric test that determines if the differences between the means of two data sets
from the same population are more significant than what their natural variation explains (2)
Sources: (1) adapted from Cumming and Johan (2014, pp. 4–7)
(2) adapted from Lewis-Beck, Bryman and Futing Liao (2004)
(3) adapted from Cornell Statistical Consulting Unit (2020)
(4) National Bureau of Economic Research (2008)
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1. Introduction
Venture capital (VC) is one of the primary funding sources providing entrepreneurial
businesses with a better opportunity for success. VC investments are often classified based
on various criteria, such as industry, location, and funding stage. This research focuses on
assessing the performance of VC investments based on their stage, particularly examining
early- versus later-stage investments.
While developing a universal definition of early- or later-stage VC investments may be

challenging, providing basic definitions that capture each stage’s characteristics of VC-backed
businesses may be necessary. “Early-stage businesses” refer to ventures that have finished
developing their products or services and have begun commercial operations but have yet to
generate profits. On the other hand, “later-stage businesses” refer to ventures that have
achieved some level of commercial success and are growing their operations by improving
their capabilities, expanding their market reach, and enhancing their products or services
(Cumming and Johan, 2014).
It is also challenging to separate the various forms of entrepreneurial finance by business

stage as investors’ preferences overlap. For instance, although angel investors are typically
associated with funding seed-stage businesses, they overlap with VC funds in financing early-
stage businesses. The financing of later-stage businesses, which private equity (PE) funds
typically favour, has also experienced an overlap due to the shift of VC funds preferences
toward these businesses (Dittmer, McCahery and Vermeulen, 2014; Shane and Nicolaou,
2018; Dai, Chapman and Shen, 2022)
This research particularly investigates the performance of early-stage VC investments, given

the higher challenges that start-ups face in securing funding and growing their businesses. In
addition, economic downturns can affect VC funds preferences and funding availability, which
in turn can have increased negative ramifications on the performance of early-stage
businesses. Consequently, this research investigates the impact of recessionary periods on
early-stage VC investments due to this higher exposure.
Moreover, the United Kingdom (UK) has a relatively well-established VC industry, with 2,860
early- and later-stage VC deals completed between 2005 and 2015, growing at a compound
annual growth rate (CAGR) of 16% (PitchBook, 2022). Despite the growth of the UK’s VC
industry, there has been limited coverage of its performance in the literature, highlighting the
significance of researching this topic.
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Therefore, this dissertation aims to investigate and analyse the performance of the UK’s early-
versus later-stage investments between 2005 and 2015. The research will also examine the
impact of economic downturns on the performance of the UK’s early-stage VC investments.
The aims of the dissertation will be achieved by pursuing four objectives. First, review the
literature on the performance of early- versus later-stage VC investments to comprehensively
understand the topic and develop the dissertation’s framework and hypotheses. Second,
analyse quantitative data on the UK’s early- and later-stage VC deals between 2005 and 2015
and further examine early-stage VC investments performance. Third, collect and analyse the
qualitative data from semi-structured interviews with VC industry experts in the UK. Fourth,
based on the research’s findings, provide recommendations for VC practitioners, businesses,
and policymakers.
Guided by the aims and objectives stated above, this dissertation will attempt to answer the
following two questions:
Question 1: Do early-stage VC investments outperform later-stage investments in the

UK?
Question 2: How does an economic downturn affect the performance of early-stage

VC investments in the UK?
Therefore, the dissertation’s scope is limited to analysing early- and later-stage VC deals
completed in the UK between 2005 and 2015. The research will focus on the performance of
these investments and the impact of economic downturns on early-stage VC deals. The
analysis will follow an explanatory-sequential approach that relies on quantitative data from
PitchBook and qualitative data from the semi-structured interviews.
The dissertation will contribute to the literature by unravelling performance patterns in the UK’s
VC industry that have received little coverage and presenting a novel understanding of its
performance relative to the economic cycle. The interviews are also expected to provide
current insights into how VC practitioners view the performance of their investments in a
different context than the literature. Moreover, academics may expand on the dissertation’s
findings and address its limitations.
Answering the dissertation’s questions may allow VC investors to shape their investment
strategy, particularly during economic downturns. The answers may also assist early-stage
start-ups in adjusting their fundraising plans during future economic downturns. Furthermore,
2
the dissertation’s conclusions can help policymakers promote investments in the UK and
address the importance of incentive programs to support this segment of the economy.
This dissertation is structured into eight chapters. Chapter (1) is this introduction to the
dissertation. Chapter (2) will provide an overview of how VC works and review the literature
on VC investment performance and the impact of the economic cycle on the VC industry. The
covered literature will be the basis for formulating the hypotheses of this research which will
be presented in Chapter (3). Chapter (4) will outline and evaluate the data collection and
analysis methodologies. A summary description of the research data will be presented in
Chapter (5), followed by a presentation of the analysis results in Chapter (6). Chapter (7) will
discuss the findings from the quantitative analysis and cross-check these findings against the
literature and the qualitative data. It will also include insights into the factors that contribute to
the performance of VC investments, including the impact of economic downturns and conclude
with a presentation of this dissertation’s contributions. The last chapter will discuss the
implications and recommendations of the findings for the UK’s VC industry, investors,
entrepreneurs, and policymakers. It will also highlight the limitations of this dissertation and
areas for future research.
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2. Literature Review
2.1. Literature review purpose
This chapter’s purpose is to review the ongoing discourse on the performance of VC-backed
investments to identify research gaps and support the formulation of the hypotheses. The
section also aims to describe the way VC traditionally works from theoretical and practical
perspectives and adopt definitions for this dissertation to help narrow the scope of the research
to be specific and realistic within the time limitations of this dissertation.
The literature reviewed in this section is based on a primary search of journal articles about
VC investment performance, funding stages and phases of the economic cycle. The
preliminary search results were narrowed down to include only peer-reviewed articles. At the
dissertation supervisor’s advice, four journals were initially prioritised due to their reputation in
the field and credibility: “Academy of Management Journal,” “Journal of Business Venturing,”
“Management Science,” “Organization Science,” and “Research Policy.” These journals
obtained the highest ranking of 4 stars from the Chartered Association of Business Schools
(CABS, 2021), except for the Journal of Business Venturing, which ranked slightly lower with
a ranking of four. Appendix 1: Ranking lists CABS’s 2021 available ranking of the journals
used in this research.
This initial screening produced a limited number of papers; therefore, the search was
expanded to include all peer-reviewed journals, publications by quasi-government agencies,
and published books, especially those specialising in VC and PE. The relevant results of this
expanded search were then summarised with their conclusions and gaps to shortlist the
literature related to the research topic. Furthermore, the literature was evaluated for potential
bias of the source based on the authors’ affiliation with existing VC funds. Analyses and
conclusions in the literature that appeared biased by affiliation have been given less or no
weight. The last literature search was for the sources referenced in the shortlisted articles
concerned with the topic. The most recently published books about VC and PE were used as
the primary source of the literature data for fundamental concepts and industry practices which
were not covered in the shortlisted peer-reviewed articles.
4
2.2. The business cycle and funding stages
Start-ups go through a predefined life cycle (Figure 1), beginning with ideation (i.e., business
idea development) and ending with the company’s public or private sale (Botella-Carrubi,
Maqueda-Llongo and Valero-Moya, 2022). Once a start-up realises a need for external
financing, VC is in development. These needs are driven by four drivers representing the
various stages of its business: “investment, profitability, cash flow, and sales growth” (Caselli
and Negri, 2018, p. 10) and based on these four drivers, Caselli and Negri identified six stages
of financial needs that can be distinguished throughout a business’s life: development, start-
up, early growth, expansion, mature age, and crisis/decline.
Ideation Early Later Maturity

(growth) stage (growth) stage
Founders, FFF, VC, VC, angel investors, VC, M&A (PE & Public investors
angel investors, crowdfunding corporate investors)
crowdfunding
Secondary
offering
IPO
Cashflow/profitability
Mezzanine
Funding stage
(Pre-IPO)
3rd round
2nd round
1st round
Seed capital
Valley of Breakeven Time

death point
Figure 1: Business funding life cycle

Adapted from Cardullo (1999, p.234)
As depicted in (Figure 1), there is an established link between a business’s life cycle and its
typical funding stages or rounds and its sources, as described by Cardullo (1999). He indicated
that as a business advances through its life stages, it requires increased funding secured from
different investor groups sharing the same investment objectives (i.e., risk and return) and
matching the characteristics of the respective funding stage. For instance, founders, family
5
friends and fools (FFF) and angels are the typical investors during the ideation stage, when
the outcome of a new venture is at its highest uncertainty and cash burn rate with minimal or
no revenues, known as the valley of death. Once the new venture survives this phase and
reaches the breakeven point, it could access more funding from a new class of investors, such
as VC, via subsequent funding rounds.
Cumming and Johan (2014) recognised that universally accepted definitions of the funding
stages or rounds, among other terms, by VC practitioners and investors in different countries
are hard to establish. They further indicated it would be more meaningful to rely on a diagram
such as (Figure 1) to define the funding stages in a VC context regardless of location.
Klingler-Vidra (2016), on the other hand, refers to early-stage investments as Series A and B
funding rounds of businesses that have already developed their products and distribution
channels. Later-stage includes Series C and beyond to finance companies with a track record
of cash flow and growing customer base. Unlike the approach of Cumming and Johan (2014),
linking each stage of investing to specific funding rounds presents a limitation when alternative
definitions are adapted elsewhere.
Defining the type or class of investors typically interested in investing in certain stages of a
business is another limitation of maintaining clear universal standards in the VC industry. VC
funds are traditionally assumed to finance start-ups in their seed and early stages; however,
there has been a documented shift to investing in the later stages of businesses (Dittmer,
McCahery and Vermeulen, 2014; Shane and Nicolaou, 2018; Dai, Chapman and Shen, 2022).
This shift created a funding gap that presented an opportunity for crowdfunding as a novel
financing mechanism for seed and early-stage start-ups (Tomczak and Brem, 2013).
Furthermore, as VC funds shift their interest to investing in later-stage businesses, they
become less differentiated from the broader PE funds (Cumming and Johan, 2014).
2.3. How VC works
The VC cycle starts with raising funds from investors, known as limited partners (LPs),
including family offices, asset management firms and pension funds until the VC managers
decide to exit a portfolio company (Dittmer, McCahery and Vermeulen, 2014). A typical VC
fund’s term sheet limits the fund’s term or life to ten years. VC funds usually invest actively
over the first three to four years of their limited life (Ramsinghani, 2021, p. 156).
6
Each VC-backed investment’s holding period (i.e., the period between the investment deal
completion date and the exit date) is expected to vary according to its financing stage.
Robinson (1987) estimated the holding period of a single VC investment to last an average of
6.3 years. The results of a more recent study by Manigart et al. (2002) are consistent with
Robinson’s findings and estimate the average holding period for early-stage ventures in the
United States (US), the UK, France, Belgium, and the Netherlands to be 6.2 years and a
shorter period of 5.1 years for later-stage investments. On the other hand, Klingler-Vidra
(2016) estimated the holding period for an early-stage investment to last between three and
five years. She also estimated a shorter holding period for later-stage investments, between
one and three years, as these investments are usually in the profit-generation business stage.
The VC’s value-added support extends beyond providing financial capital during the holding
period of their investments. Hellmann (2000) described VC fund managers as “coaches” in
long-term relationships with their portfolio companies. VC practitioners mentor their
investments’ founders, shape their business strategies, attract talents, leverage their network
to grow their businesses, and establish strategic alliances. Furthermore, VC funds assume an
essential role in their portfolio companies’ next funding rounds “in addition to providing
monitoring and other support services … venture capitalists can potentially help entrepreneurs
raise additional funds by certifying the quality of a start-up” (Denis, 2004, p. 306).
Ultimately, a VC fund’s financial and non-financial support to its portfolio companies increases
the likelihood of successful exits, thus, achieving their investment objectives at the end of the
VC cycle. VC fund managers traditionally preplan their exit from an investment either by initial
public offering (IPO) or mergers and acquisitions (M&A) (Sahlman, 1990). A VC fund could
also consider other exit alternatives, albeit less profitable, such as buybacks by the business
founders, secondary sales to new investors or writing off the investment if its business goes
bankrupt (Cumming and Johan, 2008; Caselli and Negri, 2018).
2.4. Risk and return in the VC context
A VC fund’s primary mandate is to achieve its LPs’ target returns by selecting, funding,
managing, and eventually exiting its portfolio companies (Drover et al., 2017). These returns
are linked to risk attributes of VC investments, such as the funding stages. For instance, one
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of Cochrane’s findings about the risk and return of VC investments according to their stages
is that:
“… investments in later rounds are steadily less risky. Mean returns, alphas, and betas all
decline steadily from first-round to fourth-round investments, while idiosyncratic variance
remains the same. Later rounds are also more likely to go public.”
(Cochrane, 2005, p.5)
The well-known work of Markowitz (1952) established the relationship between investment
risk and return and has since become a fundamental principle in finance and investment
theory. Consequently, the risk-return tradeoff theory was established in the investment
industry, which postulates that assuming higher risk would yield higher returns.
VC target
Stage of Pre-tax internal Investment return
funding rate of return (IRR) convention terms
First 115% 10x investment in 3 years
71% 5x investment in 3 years
Second 48% 7x investment in 5 years
Third 31% 3x investment in 4 years
Table 1: VC target returns across the different financing stages

Source: Emott (2015, p. 209)
The same is expected to apply to VC investments. Due to the lack of track record and high
uncertainty and probability of failure, early-stage financing carries a higher risk than any
subsequent stages (Emott, 2015, p. 208; Chaplinsky and Gupta-Mukherjee, 2016). Therefore,
following the logic of the risk-return tradeoff theory, early-stage investments should achieve
better performance than later-stage investments. Emott (2015) clarifies the reason by
illustrating the ranges of return typically targeted for each stage (Table 1). The trade-off
between risk and return can be easily observed in the first funding stage, in which its highest
risk translates into the highest target IRR between 50% and 115%, compared to the least risky
third funding stage with a target IRR between 26% and 31%.
The findings of Chaplinsky and Gupta-Mukherjee (2016) support this logic in their study
covering the VC-backed investment universe in the US between 1990 and 2008. The authors
find that gains versus losses (as a measurement of investment performance) of VC funds’
exits and failures correlate positively to early-stage investment allocation. In addition, what
8
differentiates their study is that it controls for shifts in the risk allocation of VC funds due to
external factors, such as the supply of investment opportunities and internal factors, such as
the accumulation of investments that have not had an exit. The authors concluded these shifts
could materially impact the VC funding available to early-stage businesses.
2.5. Strategies, performance, and the economic cycle
It is well established that VC, as an asset class, is intricately linked to capital markets and
changing economic conditions. Seemingly, empirical evidence documented the slowdown of
VC activities as capital inflow shrank due to economic shocks such as the 2000-2001 dot-com
crisis in the US and the more recent 2008-2009 global financial crisis (de Vries and Block,
2011). Changes in economic conditions and capital markets could present the same overall
effect on the VC industry over different periods, such as liquidity, funding size and risk
tolerance. However, the specific nature of this impact would vary depending on the unique
features of the economic shifts that would affect VC funds strategies (e.g., funding stage,
industry, and sector trends).
VC investments follow the cyclicality of public markets to some extent, and despite their long
investment periods, they are not insulated from fluctuations in the financial markets (Janeway,
Nanda and Rhodes-Kropf, 2021). A strong correlation has been found between VC investors’
returns and other capital market returns; thus, public markets provide valuable signals to VC
investors (Cochrane, 2005; Korteweg and Sorensen, 2010; McKenzie and Janeway, 2011;
Ewens, Jones and Rhodes-Kropf, 2013; Ning, Wang and Yu, 2015; Harris et al., 2020).
Ning, Wang, and Yu (2015) found that between 1995 and 2011, the number and values of US
VC deals were strongly affected by public markets and macroeconomic conditions. Similarly,
the analysis presented by the OECD (2009, p.22) indicates that venture investments
significantly declined in 2009 and seed, start-up, and early-stage investments followed the
same pattern. Conti et al. (2019) reached a similar conclusion when they observed the funding
available for US VC funds falling by about half due to the financial crisis.
Apart from investigating the general impact of the recession on the VC industry, researchers
also analysed shifts in strategies employed by VC managers to mitigate the effect of an
economic downturn. Conti et al. (2019) found that more experienced VC managers in the US
moved to their core sectors when investing in start-ups during the financial crisis. Furthermore,
Ning, Wang, and Yu (2015) suggest that VC funds would secure fewer, smaller deals and
increase allocations to expansion and later-stage investments.
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Block, de Vries and Philipp (2012) reported similar findings on the impact of the financial crisis
on VC asset allocations and concluded that the industry reported fewer early-stage
investments and a smaller average size of later-stage deals. They attributed these findings to
the reduced capital available for investment, risk tolerance, and increased selectivity during a
recession. Consequently, VC funds would financially support their existing portfolio companies
instead of investing in new ventures to avoid failure during an economic downturn. Similarly,
Block and Sandner (2009) found that, on average, funds raised in later-stage rounds
decreased by 20% during the financial crisis.
In contrast, Cumming, Fleming and Schwienbacher (2005) concluded when capital or exit
markets offer lower liquidity during an economic downturn, VC managers tend to invest in
early-stage businesses for their longer holding period to plan their exit when capital markets
recover. Alternatively, when the economy recovers and the markets are more liquid, VC
managers fund later-stage investments to secure faster exits to take advantage of the higher
valuations. Similarly, Inderst and Müller (2004) established that when capital markets exhibit
intense competition for investment opportunities, which drives their valuations higher, VC
managers shift from early-stage to later-stage investments as they require less non-financial
resources. The data used by Cumming, Fleming, Schwienbacher, Inderst and Müller did not
include the financial crisis period, which could explain their contrasting conclusions compared
to more recent studies.
These findings suggest that VC managers believe changing their investment strategies during
a recession can improve performance. However, Janeway, Nanda and Rhodes-Kropf (2021)
indicate that these investment strategies do not always align with the LPs' expectations.
During booms, VC funds would exit some of the investments in their portfolio companies to
take advantage of the attractive valuations and lock in higher returns. In turn, they would avoid
acquiring new assets during hot markets and require less funding from their LPs.
Simultaneously, LPs, among other investors, have significant liquidity to invest and contribute
to the influx of capital to VC assets, which would further fuel the exuberance in capital markets.
This mismatch is also argued to be true when the markets become less exuberant, the
valuations are lower, and VC managers need to draw capital from their LPs.
In contrast, an earlier study by Nanda and Rhodes-Kropf (2013) determined that VC managers
tend to take on riskier investments during hot markets, when there is an abundance of liquidity
chasing limited deals, driving valuations excessively higher. This study analysed VC
investments made in the US between 1985 and 2004 and established the higher failure for
businesses that received VC funding when the market was hot. However, VC investments
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made during the exact market conditions in the fewer successful businesses achieved higher
valuations upon going public.
While the above shows an abundance of interest in the effects of a recession on VC managers’
different strategies, there is limited coverage of how these strategies performed across
different phases of the economic cycle. Furthermore, the literature extensively covered the VC
industry in the US compared to the rest of the world, including the impact of economic
downturns, on the aggregate and individual VC investment size. The broad and breadth of
coverage of the US VC market are not surprising due to its more advanced and long-
established VC industry than its peers in developed economies such as Europe, including the
UK (Baygan, 2003; Becker and Hellmann, 2003; Schwienbacher, 2008). Therefore, this
dissertation will attempt to fill these research gaps by investigating the UK’s VC market and
expanding the limited literature about VC investment performance across different periods of
the economic cycle.
11
3. Research Hypotheses
VC managers are expected to achieve higher returns when they fund an early stage of a
business to justify the implied higher risk. This trade-off between risk and return is well-
established in the investment domain and therefore considered by VC managers in their
decisions. As discussed in Section (2.4), the risk and return of early- versus later-stage
businesses were investigated by multiple scholars who broadly categorised early-stage
funding as a riskier class that should typically yield higher returns (Cochrane, 2005; Emott,
2015; Chaplinsky and Gupta-Mukherjee, 2016). Others reached a similar conclusion based
on alternative performance and risk measures. Korteweg and Sorensen (2010) found that
later-stage investments have the lowest alpha, a measure of risk-adjusted return, among all
stages of business funding, including early-stage investments.
The work of Chaplinsky and Gupta-Mukherjee (2016) explicitly focused on investigating the
expected superior performance of VC managers with higher allocations to early-stage
companies. The authors linked the willingness of VC managers to take more risk and achieve
acceptable returns by investing in early-stage companies (typically characterised by lower
success chances) when exit markets offer attractive returns higher than the cost of the failed
business. Therefore, based on this portfolio framework, it is reasonable to assume that
Chaplinsky and Gupta-Mukherjee followed the fundamental investment principles conceived
by Markowitz (1952) to formulate their research hypotheses. The analysis of the two scholars
of the US VC market between 1990 to 2008 led them to establish that higher gains by VC
funds are positively related to early-stage investments. Thus, this research would investigate
if these findings extended to other VC markets in different geographies, such as the UK, which
leads to formulating the following first hypothesis of this dissertation:
H1: In the UK, early-stage VC investments are more likely to outperform later-stage
VC investments.
Most of the reviewed literature did not investigate the impact of economic downturns on the
performance of VC-backed investments. Instead, it addressed the shifts in investment
strategies and access to funding by VC managers due to changes in economic conditions.
Nevertheless, the performance impact can be drawn indirectly from the findings of these
studies. The documented VC managers’ strategic response to economic downturns by shifting
back to the core and later-stage investments (Block, de Vries and Philipp, 2012; Ning, Wang
and Yu, 2015; Conti et al., 2019). Their response would result in less demand for early-stage
12
investments and allow contrarian VC funds of higher risk tolerance to negotiate the terms of
funding early-stage deals better to secure higher returns once the economy recovers.
Cumming, Fleming and Schwienbacher’s (2005) observations regarding VC funds’ strategies
during an economic downturn of investing in early-stage companies align with the expected
superior performance of these investments once the exit markets bounce back. Other studies
in the reviewed literature suggested that VC investments made during an economic peak are
more likely to fail (Nanda and Rhodes-Kropf, 2013), providing further support for the expected
higher returns on early-stage VC investments made during a recession.
Wong’s (2002) paper promoted the attractive expected returns on seed investments during an
economic downturn. Still, his findings were potentially biased due to his exposure to seed
investments during his study period. Nonetheless, the logic behind his conclusions can also
extend to support the likely higher returns on early-stage investments made during a
recession. Several factors, including less competition for deals by investors during economic
downturns, put VC managers with dry powder in a better position to select potential winners
across the universe of early-stage deals. Consequently, VC managers would perform due
diligence effectively, negotiate better terms and valuations, and easily apply their skills to
select winners. VC managers would, therefore, expect superior exit returns on these
investments as the economy recovers. Hence, this analysis would support the following
second hypothesis of this dissertation:
H2: In the UK, VC-backed investments in early-stage businesses completed during an

economic downturn are more likely to outperform similar investments completed
in other periods.
13
4. Methodologies and Limitations
The performance of VC-backed investments, particularly in the UK, received low coverage in
the recent literature; hence, this research attempts to explore this under-researched topic. By
analysing the performance of VC-backed investments in the UK, this dissertation aims to
establish if investing in early-stage businesses outperforms later-stage businesses. It also
aims to investigate if VC investments in early-stage companies during the 2008-2009 financial
crisis outperformed similar investments in other periods. Thus, the analysis covers the UK’s
VC deals from 2005 to 2015 and their subsequent exits to date. This period includes
investments made during the financial crisis and accounts for the average holding period of
five to six years for a typical VC investment discussed in Section (2.3).
Collecting the data for this research follows a mixed quantitative and qualitative methodology.
The quantitative approach aims to measure the performance of the research’s sample to
establish generalisable conclusions. On the other hand, the qualitative approach shapes the
findings of this research in the context of the current VC practice.
Quantitative secondary data was collected from PitchBook database to identify, classify, and
measure the performance of the UK’s early- and later-stage VC investments and exits during
the examined period. VC deals dates and values, percentages acquired, exit dates and values
are the main secondary data points necessary to calculate IRRs as a performance
measurement. Furthermore, data from PitchBook covering the business status and exit type
of each deal in the sample provides a secondary measure of performance.
The research also relies on qualitative data from semi-structured interviews with VC
practitioners in the UK to supplement the findings from the quantitative analysis. These
interviews also provided in-depth, first-hand insights into the general VC practice concerning
this dissertation’s topic. PitchBook is also the primary source for identifying interview
candidates, supplemented by recommendations from the research supervisor.
4.1. Data collection methodology
Quantitative data necessary to test this dissertation’s hypotheses were collected from
PitchBook data sets. PitchBook was indeed used as the primary source of data in several VC
and PE studies (Cumming, 2012; Klingler-Vidra, 2016; Splenda and Barnhart, 2017).
Retterath and Braun (2020, p. 1) also established that PitchBook data sets, among others,
14
“have the best coverage, and are the most accurate databases across [the] key dimensions
of general company data, founders and funding information”.
The screening of VC deals in PitchBook data sets generated the studied sample. The
screening criteria were early- and later-stage VC deals of UK-based businesses completed
between 1 January 2005 and 31 December 2014 and made by UK investors whose primary
activity is VC investing. To measure the performance of the sample deals, exits and business
status data were populated from the same database by running a second screening for early-
and later-stage VC exits in the UK completed after 1 January 2005 to date. Exits comprised
all venues in the database, including but not limited to IPOs, M&As, and bankruptcies.
Data collection aims to have reliable measures of the variables under each hypothesis in this
research. The sample’s exit and business status data were collected to measure each deal’s
performance ranking, representing the statistical models’ dependent variable. The
independent variable of H1’s statistical tests is early- versus later-stage VC deal type, and its
data were collected accordingly. The UK’s seasonality-adjusted quarterly real gross domestic
product (GDP) was the independent variable reflecting the impact of the economic cycle on
the performance of VC investments. GDP data during the examined period were collected
from the International Monetary Fund (IMF). Data for the control variables discussed in Section
(5.3) were also collected.
The qualitative data were collected through semi-structured interviews with VC practitioners
in the UK. Two sources of contacts were utilised to approach interview candidates: the
PitchBook investors data set and referrals from this research supervisor to secure at least five
interviews. The interviews lasted an average of thirty minutes and were conducted online or
by phone. The interview questions aimed at collecting data on the participants’ experience of
investing in either early- or later-stage VC deals, the performance of investments made during
an economic downturn and their take on risk in relation to VC assets. Interview participants
were free to provide broad input on these subjects at the start and were asked specific
questions to cover the missing data at the end of the interviews. The University’s research
protocols were strictly followed throughout this process.
The objective of combining quantitative and qualitative data collection methods was to
enhance the significance of conclusions through data analyses of the relationship between
achieving superior performance by investing in early-stage businesses on the one hand and
selecting winners during an economic downturn on the other.
15
4.2. Analysis methodology
This research follows an explanatory-sequential approach in which the researcher employs

qualitative data to interpret and assess the results of the quantitative analysis (Edmonds and
Kennedy, 2017, chap. 17). Hence, the dissertation was designed to start by collecting and
analysing the quantitative data, followed by collecting qualitative data from the semi-structured
interviews described earlier. Quantitative methodologies involved running a t-test and
regression models on the performance data, while the qualitative methodology focused on
unravelling other explanatory factors not captured by the quantitative data.
The collected quantitative data were initially prepared to ensure their accuracy and relevance.
These preparation steps also transformed the row data into the required measurements of the
variables of the statistical analysis models. For instance, VC deals that showed in the
screening results completed outside the examined period were excluded from the sample.
Furthermore, the sample’s VC deals and their corresponding likely exits and business status
were matched since their data were collected separately from two data sets. Data were then
transformed into performance measurements of the sample deals, primarily IRR and,
secondarily, performance ranking.
IRR values were calculated using Microsoft Excel for the sample subset with the required
calculation inputs of the initial investment values, exit values, and holding periods. While this
calculation does not account for the cash collected during the holding period, it is still used as
a proxy for the performance of VC investments in other studies (Mason and Harrison, 2002).
Outlier IRR values were not excluded from the sample as they represented the outperforming
winners or unicorns. Hence, their exclusion would likely result in an inaccurate conclusion
regarding the hypotheses. This sample subset is then expanded to include the rest of the
deals with available data for their current business status and exits transformed into an ordinal
variable used in an alternative statistical performance test.
Moreover, the continuous variable of the UK’s seasonality-adjusted quarterly real GDP on the
date of each VC deal captured the effect of economic downturns in the statistical models.
Then, the quantitative data were tested and normalised for skewness and kurtosis where they
were present. After that, the data was applied to the t-test and ordinal logistic regression (OLR)
models testing the hypotheses using Minitab software.
The research’s qualitative interview data were recorded and instantly transcribed verbatim
using Microsoft Teams or Microsoft Word and later reviewed for accuracy. The researcher
16
used his licenced account to store, access, and analyse the qualitative data from a secure
cloud service his University provided. The content of the data was categorised and analysed
under the following four themes:
i. Categorising VC investments based on their stage
ii. Defining the success and failure of VC investments
iii. Considering risk relative to the funding stage
iv. Evaluating VC investments completed in a recession
Lastly, the findings from this thematic analysis are then cross-checked against the findings
from the quantitative analysis to bridge gaps and address unexplained observations, thus
shaping the research results.
4.3. Evaluation and limitations
This last section of the methodologies chapter evaluates and addresses the limitations of
collecting and analysing the data of this research. The research’s sample might have excluded
VC deals which could have altered its findings. This limitation is due to relying on PitchBook
as its sole source of quantitative data. Some VC deals that receive limited coverage in the
public domain are not expected to be represented in this database. Other researchers usually
supplement their samples by referring to multiple databases or sources of information in the
public domain to ensure higher representation (Chaplinsky and Gupta-Mukherjee, 2016;
Roma, Vasi and Kolympiris, 2021). However, this research’s sample size is large enough to
assume that it sufficiently represents the universe of examined VC deals, thus reducing the
downside of this limitation.
This research also relied on PtichBook’s categorisation of VC deals by business stage, which
could present, in some cases, a limitation if it is inconsistent with the collected qualitative data.
Thus, interview participants’ insight into the classification of VC deals was collected and cross-
checked against the quantitative data for uniformity of VC stage interpretation.
Missing data bias is another limitation likely to impact the level of generalisation of the findings
of this dissertation. The database did not include the required input to calculate IRR values for
several VC deals. Therefore, the analysis methodology was designed to address this limitation
by the two tests for performance using IRR values of the sample’s subset with complete
information and the performance ranking for the entire sample. The test results of the two
performance measurements were then cross-checked for any inconsistent findings.
17
The sample included the 2008-2009 financial crisis as the one major economic downturn event
to test H2. Restricting the scope of this research was due to the limited access to the required
data to expand the analysis period. However, this limitation presents an opportunity for other
researchers to examine the performance impact of other major economic downturns on the
UK’s VC industry.
Analysing the qualitative data collected from the semi-structured interviews will likely lead to
findings that cannot be generalised beyond the interview sample group. This limitation is not
assumed to significantly impact the conclusions of this dissertation since it is designed to
follow an explanatory-sequential approach, as explained in Section (4.2). After all, the
qualitative data were utilised to present the findings from the quantitative analysis. The
following chapter summarises the dissertation’s quantitative and supporting qualitative data.
18
5. Research Data
5.1. Sample description
PitchBook’s VC deals data subset included the details of 134,094 deals of all VC stages
globally when the quantitative sample was populated on 8 December 2022. A preliminary
sample of 2,878 VC-backed early- and later-stage deals in the UK was created by applying
the screening criteria described in Section (4.1). This sample was further refined by excluding
18 deals completed outside the examined period, which still showed in the screening results
and 105 deals with business status values outside the performance measurement definition
and no available IRR information. The excluded deals represented 4% of the initial sample.
Accordingly, the final research sample comprised 2,755 early- and later-stage VC-backed
deals in the UK, completed between 1 January 2005 and 31 December 2014.
Billions
1.5% $522
1.0%
$512
0.5%
0.0% $502
-0.5%
$492
-1.0%
$482
-1.5%
-2.0% $472
-2.5%
$462
-3.0%
-3.5% $452
Q3
Q1
Q4
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Q3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP % change (QoQ)
Figure 2: The UK’s quarterly real GDP adjusted for seasonality (Q1-2005 to Q4-2014)
Data source: IMF (2023)
The depicted impact of the financial crisis on the UK’s economy in (Figure 2) extended to its
VC industry as the annual volume declined by 7% and the aggregate value of VC deals by
44% in 2009. This year-on-year decline was the highest during the examined period. When
considering early-stage VC deals, the impact was noticed a year earlier, in 2008, causing their
volume to decline by 10% (Figure 3).
Regardless of the impact of the crisis, the UK’s VC industry achieved a CAGR of 16% and
14% for the volume and values of its deals, respectively. The volume of later-stage deals
19
reported an even higher CAGR of 22% and 20% for their value due to investors’ preference
shift to later-stage investments, which was clearly observed following the end of the financial
crisis.
Deals Value (millions)

$450 450
$400 400
$350 350
$300 300
$250 250
$200 200
$150 150
$100 100
$50 50
$- 0
Q1
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Early-stage - Volume Later-stage - Volume Early-stage - Deals Value Later-stage - Deals Value
Figure 3: Quarterly volume and value of the UK’s VC deals (Q1-2005 to Q4-2014)
Data source: PitchBook (2022)
The sampled data indicate that the number or volume of early-stage VC-backed deals in the
UK was always higher than later-stage deals throughout the examined period. In contrast, the
average size of later-stage deals was higher despite their lower volume. This outcome is likely
due to the lower funding requirements of early-stage businesses and fewer surviving
businesses seeking later-stage funding.
The screening of VC exits between 1 January 2008 and 8 December 2022 in the UK resulted
in 2,896 exits, of which 1,280 exits matched the VC deals in the final sample. Following the
preparation of the combined data from the two screenings, only 851 VC deals representing
31% of the sample, had complete information to calculate their IRRs. Thus, a subset sample
of these VC deals was created to use IRR as the performance dependent variable in the
analysis. However, since 69% of the sample has missing IRRs, a second test of the
performance of the VC deals in the entire sample was performed using the performance
ranking as an alternative dependent variable.
20
Exit venues comprise public markets (IPOs and secondary offerings), M&A (mergers, reverse
mergers, acquisitions, MBOs, and LBOs), and bankruptcies (admin reorganisations,
liquidations, and out-of-business). PitchBook did not report any exit event under either of these
three categories for 1,055 VC deals in the sample. Thus, VC investors were still assumed to
hold their investments in these deals. Expectedly, 30% of the sample’s early-stage deals
failed, higher than later-stage deals (Figure 4). Furthermore, exits by M&A were significantly
higher than IPOs for both VC stages during the examined period.
41%
38%
37%
33%
30% 31%
29%
26%
19%
6%
4% 5%
Bankruptcy IPO M&A Not Exited
Early-stage Later-stage Combined
Figure 4: Exits breakdown of the sampled deals

Data source: PitchBook (2022)
5.2. Primary variables
Investigating the two hypotheses relied on four primary dependent and independent variables
(Table 2). To test H1, a t-test of the difference in the means of logs (IRR+1) of early- and later-
stage VC deals was conducted for the sample’s subset with complete IRR input data. A
second test using the OLR model of the same hypothesis was run on the entire sample, where
the performance ranking was the dependent variable.
The IRRs were calculated from the available input data in PitchBook’s database and
normalised afterwards using their logs. Since several IRRs were negative, the normalisation
method comprised calculating the logs of (IRR + 1) for all available IRR data points. The
differences in performance between early- and later-stage VC deals were not impacted after
this transformation; thus, log (IRR+1) was used instead of IRR to test H1.
The performance ranking variable in the secondary OLR model to test H1 was based on
business status and exit-type data from PitchBook, coded into five ordinal responses. The
performance ranking of the sample’s early-stage deals was the dependent variable, and the
21
UK’s quarterly real GDP adjusted for seasonality was the independent variable in the model
testing H2.
Variable Description
Dependent:
log (IRR+1) The internal rate of return for each VC deal was calculated with the inputs of post-money
business valuation, business valuation at the exit, VC deal date and exit date and
assumed to be (-100%) for failed businesses. The log of (IRR+1) was the normalisation
method for the presence of high skewness and kurtosis in the calculated IRRs
Performance A dependent variable was created by coding the business status and type of exit to five
ranking ordinal responses:
▪ Highest: successful exit (IPO or M&A)
▪ High: profitable business status
▪ Medium: generating revenue business status
▪ Low: not profitable business status
▪ Lowest: failed business (bankruptcy or out-of-business)
Independent:
Funding stage A binary dummy variable was created by coding the funding stage of each VC deal in
the sample using early-stage funding as the reference level
GDP The UK’s quarterly real GDP adjusted for seasonality during the examined period to test
H2 for the impact of economic downturns on the performance of early-stage VC deals
Control:
Primary industry A categorical dummy variable was used in testing H1 and H2 and created by coding the
primary industry of each VC deal in the sample using the energy industry as the
reference level
GDP The UK’s quarterly real GDP adjusted for seasonality during the examined period used
in testing H1 as a control variable
Table 2: Description of the research variables
5.3. Control variables
The purpose of adding control variables to the regression models is to account for the
influences of the relevant factors that typically impact the performance of VC investments other
than the examined independent variables. Predictably, the varying performance of their
respective industries could explain the differences in the performance of VC investments.
Therefore, the OLR models testing H1 and H2 used the primary industry of each deal as a
control variable. The primary industries were categorised into products and services (B2B and
B2C), energy, financial services, healthcare, IT, and materials and resources. Furthermore,
the UK’s quarterly real GDP adjusted for seasonality was included in the regression models
testing H1 and H2 to account for the impact of the financial crisis on the performance of all VC
deals in the sample.
22
5.4. Descriptive statistics
Testing the research’s data distribution for skewness and kurtosis revealed that the calculated
IRRs exhibited high positive levels of both measures and, in turn, a non-normal distribution. In
contrast, the rest of the variables showed acceptable levels of skewness and kurtosis and
were assumed to be normally distributed (Table 3). Therefore, the IRRs were transformed and
normalised using their logs (Lewis-Beck, Bryman and Futing Liao, 2004, p. 746). The log
(IRR+1) values of early- and later-stage VC deals were then used in H1’s t-test. The below
table also confirms that IRRs for 1,904 VC deals (69% of the sample) had missing values,
which limits the reliability, validity and generalisation of the findings from the t-test.
Count Missing Mean St Dev Min. Max. Skewness Kurtosis

IRR 851 1,904 -0.7 1.4 -1.0 34.4 20.4 506.9
log (IRR+1) 851 1,904 -1.7 0.8 -2.0 1.5 2.1 2.4
Ranking 2,755 0 2.8 1.7 1.0 5.0 0.4 -1.6
Early-stage 1762 0 0.6 0.5 0.0 1.0 -0.6 -1.7
Later-stage 993 0 0.4 0.5 0.0 1.0 0.6 -1.7
GDP 388 0 481.1 14.7 452.0 510.8 0.3 -0.6
Industry 2,755 0 4.3 1.4 1.0 6.0 -0.3 -0.7
Table 3: Descriptive statistics of IRR, log (IRR+1), ranking, stage, GDP, and industry
The perfectly positive correlation between log (IRR+1) and the performance ranking indicates
that the latter can substitute log (IRR+1) as a performance measurement to test the
hypotheses of this research (Table 4). Recognising the performance ranking as the dependent
variable to test the hypotheses without dropping any VC deal from the sample would therefore
improve the reliability, validity and generalisation of the findings of this research.
IRR log (IRR+1) Ranking Early-stage Later-stage GDP Industry

IRR 1.00
log (IRR+1) 1.00 1.00
Ranking 1.00 1.00 1.00
Early-stage -0.03 -0.03 -0.10 1.00
Later-stage 0.03 0.03 0.10 -1.00 1.00
GDP 0.12 0.12 -0.06 0.02 -0.02 1.00
Industry -0.03 -0.03 0.02 0.06 -0.06 0.04 1.00
Table 4: Spearman correlations of IRR, log (IRR+1), ranking, stage, GDP, and industry
23
In addition, the negative correlation of -0.10 between the performance ranking and early-stage
VC investments does not align with the previously discussed literature that supported their
expected superior performance. On the other hand, the negative correlation between the
performance ranking and GDP supports the assumption of the likely higher performance of
VC investments completed during an economic downturn. The statistical significance of these
relationships is further investigated in the next chapter.
5.5. Qualitative data
The collected qualitative data from the semi-structured interviews are summarised below
under the four primary themes:
i. Categorising VC investments based on their stage
Interview participants agreed on the lack of a universal definition of VC deals by stage due to
differences in their characteristics by different industries and geographies. Furthermore, the
interviews revealed that some VC deals in the sample were inconsistently categorised in
PitchBook in reference to the categorised stage by the interviewees who managed these
investments.
It was recognised during the interviews that the categorisation of VC deals could be
established in each industry or geography based on criteria such as revenue generation
status, product-market fit, management and board formation, and readiness for the next round
of funding. However, categorising VC deals by the number or size of their funding rounds
would be less accurate.
ii. Defining the success and failure of VC investments
The limitation of having a universal definition of VC investment performance also applies to

this second theme, as it would vary based on the perception of the VC managers and their
LPs. Furthermore, the interviews showed that measuring the success or failure of a business
would vary according to its industry.
Multiple success signals cited during the interviews include meeting revenue targets and
raising capital from new investors in subsequent funding rounds. It was also cited that a VC
deal’s ultimate success is realising the target return via a successful exit. However, most VC
managers do not achieve their targets as the conditions change during their relatively long
investment holding period.
24
On the other hand, a business would be reasonably considered a failure when it stops
generating enough cash (either internally or externally) to survive. Interestingly, Cary (2022)1
emphasised the benefit of tax relief from failed early-stage businesses. The UK government
offers tax relief schemes to support start-ups, including the Enterprise Investment Scheme
(EIS) and the Seed Enterprise Investment Scheme (SEIS). These schemes substantially
reduce the losses of VC investors and LPs from their failed early-stage investments.
iii. Considering risk relative to the funding stage
Most participants indicated they do not follow a formal policy to account for risk when investing
in VC deals. However, their risk tolerance would be already an integral part of their investment
style and addressed when setting their target returns. The participants also agreed that early-
stage investments generally indicate assuming a higher risk. Besides the business stage,
several factors are considered when assessing the risk of an investment, such as the
legitimacy of the business, established affiliations with prominent private or public
organisations, successful previous rounds of funding, product profile and management
experience.
iv. Evaluating VC investments completed in a recession
The participants’ experiences with the investments made during a recession varied. Some
participants indicated that economic downturns do not impact their investment style due to the
defensive nature of their preferred industries. Consequently, the impact of an economic
downturn on VC investments would vary according to the nature of their industries.
Few participants indicated they followed an opportunistic approach during the recent
recessions, as weaker businesses usually accept lower valuations to raise the necessary
funding. However, they also suggested that investing during a recession would not necessarily
yield superior returns when the markets recover. In contrast, losses could be magnified as VC
managers are forced to extend their holding period of these businesses. During an economic
downturn, these businesses are expected to require financial backing, which they usually fail
to raise externally. Most interviewees agreed that their VC funds and portfolio businesses had
experienced difficulties raising debt from banks and equity capital from their LPs during recent
economic downturns.
1 Lucius Cary is the Managing Director at Oxford Technology Management, a UK based VC firm established in
1983 managing multiple seed, early-stage and follow-on funds of novel science/technology businesses and
actively assisting their portfolio companies in their early years (https://www.oxfordtechnology.com/).
25
6. Analysis and Results
Following the introduction of the research data, this chapter presents a summary analysis and
the results of the statistical models discussed in Section (4.2), testing the dissertation’s
hypotheses. Next, the outcome of the t-test and each regression model is presented and
analysed, followed by their respective hypothesis test results.
6.1. IRR: early- versus later-stage
A t-test was conducted on the available IRR data after adjusting for its high kurtosis and
skewness and transforming it to a normal distribution. It is necessary to establish with a
statistical significance that the mean of log (IRR+1) for early-stage VC deals is higher than the
later-stage deals to test H1 using log (IRR+1) as the performance variable.
Statistics Early-stage Later-stage t-test results Value

Sample size 621 230 Difference -0.042
Mean -1.698 -1.656 95% lower bound of difference -0.141
95% lower bound -1.747 -1.741 t-value -0.710
Standard deviation 0.750 0.782 DF 395
SE 0.030 0.052 p-value 0.761
Table 5: t-test of log (IRR+1), early-stage versus later-stage
The means t-test of the two independent samples, early- and later-stage VC deals, was
conducted using Welch’s method in Minitab software (Table 5). Welch’s method does not
assume or require that the variances of the two samples be equal and performs well when the
sample sizes are not equivalent.
The two independent samples have acceptable 0.03 and 0.05 standard errors of the mean.
However, several log (IRR+1) data points were unusual compared to others in the sample,
which can strongly influence the t-test’s results. Correcting this limitation by removing the
outliers impacts the validity of the hypothesis test’s findings for this research. After all, positive
outliers represent the winning VC investments (unicorns) that typically influence the
performance of VC funds and should be part of H1’s t-test.
26
The rest of the assumptions of the t-test model are as follows:
μ₁: population mean of log (IRR+1) when the VC stage = early-stage
µ₂: population mean of log (IRR+1) when the VC stage = later-stage
Difference: μ₁ - µ₂
Null hypothesis of the t-test: Ht₀: μ₁ - µ₂ = 0
Alternative hypothesis of the t-test: Ht₁: μ₁ - µ₂ > 0
Based on the t-test results in (Table 5) we fail to reject Ht₀. This outcome is due to the p-value
of 0.761 being substantially greater than the 0.05 significance level, which is the risk of
incorrectly concluding that the mean of log (IRR+1) for early-stage VC investments is greater
than for later-stage investments. Therefore, there is insufficient evidence to conclude that the
mean of log (IRR+1) of early-stage VC deals is greater than that of later-stage deals at the
0.05 significance level. Furthermore, the confidence interval (CI) quantifies the uncertainty
associated with estimating the mean difference from sampled data; thus, with 95% confidence,
the true difference is greater than -0.141.
Consequently, the t-test of the log (IRR+1) for early- and later-stage VC deals reveals that this
research cannot reject H1’s null hypothesis. Thus, no evidence from this test supports the
better performance of the UK’s early-stage VC investments than later-stage based on the
sample’s available IRRs between 2005 and 2015. Since the t-test has excluded 69% of the
VC deals in the sample, the following section re-examines H1 using the performance ranking
of the total sample in an OLR model secondary test.
6.2. Ranking: early- versus later-stage
In this second attempt to test H1, the responses of the dependent variable are the performance
ranking of all VC deals in the sample comprising ordinal data of five responses. The predictors,
conversely, include the categorical data of the VC deal stage and industry variables and the
continuous GDP data. Choosing OLR to model the relationship between the ordinal responses
and the categorical and continuous predictors was due to the model’s power to capture the
responses ordering effect (Cornell Statistical Consulting Unit, 2020).
The model establishes a statistically significant association between the response (ranking)
and the predictors (later-stage VC deals, GDP, financial industry, IT, and products & services)
since the p-values of these predictors are less than the significance level of 0.05 (Table 6).
This statistical significance is further supported by the results of LR chi2, confirming that at
least one independent variable in the model is statistically significant.
27
Odds 95% CI 95% CI
Logistic regression table Coeff SE Z p-value ratio lower upper
Predictor:
Constant (1) 1.983 1.171 1.693 0.090
Constant (2) 1.996 1.171 1.704 0.088
Constant (3) 2.041 1.171 1.743 0.081
Constant (4) 3.655 1.173 3.116 0.002
Stage:
Later-stage 0.386 0.074 5.214 0.000 1.471 1.272 1.701
GDP -0.007 0.002 -2.908 0.004 0.993 0.988 0.998
Industry:
Financial services 1.296 0.303 4.281 0.000 3.655 2.019 6.615
Healthcare 0.365 0.190 1.922 0.055 1.441 0.993 2.091
IT 0.875 0.184 4.749 0.000 2.399 1.672 3.442
Materials & resources 0.476 0.280 1.796 0.090 1.609 0.929 2.788
Products & services 0.586 0.184 3.186 0.001 1.796 1.253 2.575
Response information Count % Measures of association Value

Ranking variable: Concordant (% of pairs) 58%
Exited 975 35.4% Discordant (% of pairs) 41%
Profitable 8 0.3% Ties (% of pairs) 1%
Generating revenue 28 1.0% Total 100%
Not profitable 1,019 37.0% Somers’ D 0.16
Failure 725 26.3% Goodman-Kruskal Gamma 0.16
Total 2,755 100.0% Kendall’s Tau-a 0.11
Linearity and model fit Value p-value

LR chi2 85 0.000
Log-likelihood -3,127 -
Pseudo R2 0.0133 -
Deviance chi2 1,230 1.000
Table 6: OLR model results for H1: ranking versus stage, GDP, and industry
The coefficient for later-stage deals is positive 0.386, implying that later-stage VC deals
generally rank higher than early-stage ones. Moreover, the odds ratio2 for later-stage of 1.471
indicates that investing in early- instead of later-stage funding rounds would decrease the
investors’ probability of enhancing the ranking of their investment performance by a factor of
0.68. This statistically significant result contradicts the first hypothesis of the likely better
performance of early-stage VC investments.
2 The odds ratio represents the probability of going up the performance ranking table for each response.
28
Another key takeaway from the model is the inverse relationship between ranking and GDP.
This inverse relationship increases the probability of achieving better performance for VC
investments (regardless of stage) completed during an economic downturn (i.e., when GDP
decreases). Furthermore, the odds ratio for the GDP of 0.993 suggests a decrease of one
GDP unit would increase the probability of a VC deal achieving a higher ranking by a factor of
1.007. The model also indicates that VC investments in the financial services sector achieved
a higher ranking among other primary industries.
Deviance chi2 examines the model’s fit, where the null hypothesis for this test is the data fit
the model well. Since the p-value is high, this null hypothesis is not rejected, and in turn, it is
concluded that the data fit this model well. Additionally, this model’s measures of association3
determine how well the model performed based on the cumulative probabilities of each
observation versus the values of each pair of observations. With 58% concordant pairs and
41% discordant pairs, it could be concluded that the model has a reasonable level of predictive
performance.
The results of the second test of H1 using the OLR model led to failing to reject its null that
the UK’s later-stage VC investments are more likely to outperform early-stage VC investments.
Therefore, the results of this model did not change the findings based on the t-test in Section
(Error! Reference source not found.), supporting the failure to reject the null hypothesis of
H1.
6.3. Early-stage VC deals during a recession
Testing H2 follows the OLR methodology discussed and justified in Section (6.2). However,
the stage of VC deals categorical data were dropped from the OLR model since only early-
stage deals are tested in H2. Furthermore, the continuous GDP data were the primary
predictors that captured the impact of the recessionary period on the performance of early-
stage deals. The categorical industry predictors were kept in the model as the control variable
in the OLR model (Table 7).
This model also establishes a statistically significant association between the response
(ranking) and the predictors (GDP, financial industry, and IT) since their p-values are less than
the significance level of 0.05. Similarly, this statistical significance is supported by the results
3 The values presented here measure the association between the response variable and predicted probabilities
and is part of the analysis output provided by Minitab software.
29
of LR chi2, confirming that at least one independent variable in this model is statistically
significant.
Odds 95% CI 95% CI

Logistic regression table Coeff SE Z p-value ratio lower upper
Predictor:
Constant (1) 3.046 1.431 2.129 0.033
Constant (2) 3.061 1.431 2.140 0.032
Constant (3) 3.115 1.431 2.177 0.029
Constant (4) 4.600 1.433 3.210 0.001
GDP -0.009 0.003 -2.902 0.004 0.991 0.986 0.997
Industry:
Financial services 0.904 0.355 2.545 0.011 2.470 1.231 4.956
Healthcare 0.134 0.230 0.580 0.562 1.143 0.728 1.795
IT 0.528 0.221 2.392 0.017 1.695 1.100 2.612
Materials & resources 0.257 0.334 0.768 0.442 1.293 0.672 2.488
Products & services 0.370 0.220 1.686 0.092 1.448 0.942 2.227
Response information Count % Measures of association Value

Ranking variable: Concordant (% of pairs) 55%
Exited 584 33.1% Discordant (% of pairs) 44%
Profitable 6 0.3% Ties (% of pairs) 2%
Generating revenue 21 1.2% Total (% of pairs) 100%
Not profitable 618 35.1% Somers’ D 0.11
Failure 533 30.2% Goodman-Kruskal Gamma 0.12
Total 1,762 100.0% Kendall’s Tau-a 0.08
Linearity and model fit Value p-value

2
LR chi 25 0.006
Log-likelihood -2,044 -
2
Pseudo R 0.0004 -
Deviance chi2 709 1.000
Table 7: OLR model results for H2: ranking versus GDP and industry
The negative coefficient for the independent variable GDP of -0.009 implies that early-stage
VC deals completed during an economic downturn when GDP decreases rank higher than
similar deals completed during expansionary economic periods as GDP rises. The GDP
coefficient in this model testing H2 is lower than the same coefficient in H1’s OLR model,
confirming that early-stage VC deals would outperform later-stage deals completed during an
economic downturn. Moreover, the 0.991 odds ratio of GDP suggests a decrease of GDP by
one unit would increase the probability of an early-stage VC deal achieving a higher ranking
by a factor of 1.009. These statistically significant results are in line with the conjecture in H2.
30
This model’s high p-value of Deviance chi2 confirms that the data fit this model well.
Furthermore, this model’s measures of association show that 55% of its pairs of observations
are concordant and 44% are discordant, signalling a reasonable level of predictive
performance. The significant result of this model leads to rejecting H2’s null hypothesis and
confirms that VC-backed investments in early-stage businesses made during a recessionary
period are more likely to perform better than similar investments made in non-recessionary
periods.
31
7. Discussion
This chapter starts by summarising the findings and their interpretation in the context of the
research questions, objectives, and hypotheses. The discussion then expands to validate
these findings against the literature, explains the unexpected results from testing H1 and
establishes how the H2 test’s findings align with the literature. Since the research follows an
explanatory-sequential approach, further explanations of the findings are extrapolated from
the qualitative data. The chapter concludes with how the research results contribute to
understanding the performance of the UK’s early- versus later-stage VC investments and the
higher probability of achieving superior returns during economic downturns.
7.1. Summary of the findings
The t-test and the OLR model testing H1 found that early-stage VC investments did not
outperform later-stage VC investments in the UK between 2005 and 2015, which could have
several implications for VC investors, entrepreneurs, and policymakers. This finding could be
explained by the higher volume of early-stage deals coupled with the higher percentage of
their businesses that either failed or were not profitable, diluting their mean returns.
Additionally, early-stage businesses require more funding rounds, non-financial support and
a longer investment holding period to succeed. These resources are not available to all early-
stage businesses leading to their higher failure rate, increasing their risk and lowering their
returns. In contrast, later-stage companies require less support since they are more
established and perceived as less risky, with greater potential for higher returns. In turn, the
higher investors' demand for the more attractive later-stage businesses would increase their
valuations.
The combined value of early-stage deals was also lower than later-stage VC deals, indicating
that early-stage businesses faced challenges securing funding to scale their operations, albeit
with lower funding requirements. Early-stage companies may be less attractive to investors
due to their higher risk and more significant uncertainty around their success. Additionally, the
UK’s ecosystem for early-stage businesses may have been less developed during the
examined period, limiting the available resources and contributing to their higher failure.
H2’s OLR model results established that early-stage VC deals in the UK completed during
economic downturns outperform similar deals completed in other periods. Economic
downturns could present an opportunity for early-stage businesses to take more risks to
32
emerge and grow. Their higher agility and adaptability allow early-stage businesses to pivot
and capitalise on changing market conditions. On the other hand, later-stage companies may
exhibit less agility, struggle, and be less willing to take on additional risks. Due to these factors,
economic downturns are expected to shift investors’ preferences towards earlier-stage
businesses when later-stage companies are considered more vulnerable to adverse economic
conditions and more likely to generate lower returns. Furthermore, less competition for deals
by investors during economic downturns allows VC managers with a dry powder to invest in
these deals at attractive valuations. Thus, investments in the UK’s early-stage VC deals
completed during an economic downturn achieved better performance once the markets
recovered.
The research’s models also establish a secondary finding that between 2005 and 2015, the
financial service sector outperformed other sectors in the UK for both early- and later-stage
VC investments. This sector comprises sub-sectors like fintech, banking, and asset
management which witnessed significant innovation and disruption during the examined
period, which could explain the sector’s highest ranking.
7.2. Findings versus the literature
The failure of the research models to validate the conjecture of H1 that early-stage VC
investments are likely to outperform later-stage investments based on the sample led to
findings that contradict the literature presented in Section (2.4). The assumed trade-off
between risk and return was the basis for formulating H1. Due to the dissertation’s limitation
of relying on the business stage as the only dimension of the risks associated with VC
investing, it would be inaccurate to categorically conclude that Markowitz’s (1952) risk-return
tradeoff theory does not hold.
Furthermore, as discussed earlier, multiple scholars considered early-stage VC deals riskier,

which should achieve higher returns (Cochrane, 2005; Emott, 2015; Chaplinsky and Gupta-
Mukherjee, 2016). Likewise, others concluded that later-stage investments have the lowest
risk-adjusted returns (Korteweg and Sorensen, 2010). These conclusions do not align with the
findings of this research which could be attributed to several factors. For instance, the
characteristics of the samples of these studies differed from this research’s sample.
Cochrane’s (2005) sample covered VC deals in the US between 1987 and 2000 and was
collected from VentureSource database. Chaplinsky and Gupta-Mukherjee’s (2016) sample
was primarily collected from Thomson Reuters’s Venture Economics database covering the
33
US VC deals from 1990 to 2008. Korteweg and Sorensen (2010) relied on VentureXpert and
VentureSource to collect their US VC deals data between 1987 and 2005.
Consequently, the periods examined in these studies have exhibited different economic
conditions than those covered in this research. Furthermore, the US VC industry is far more
advanced than the UK’s, and their start-up ecosystems are incomparable (Baygan, 2003;
Becker and Hellmann, 2003; Schwienbacher, 2008). This research also relied on a different
database that adopts another classification of VC deals which could further justify this
disagreement.
The findings from H2’s test agree with the literature covered in Section (2.5) that early-stage
VC deals completed during economic downturns are likely to outperform similar deals
completed in other periods. These outcomes align with Cumming, Fleming and
Schwienbacher’s (2005) conclusions about the shift to investing in early-stage VC deals during
an economic downturn. Furthermore, Wong (2002) implied these investments would achieve
superior performance once the capital markets bounce back. Nanda and Rhodes-Kropf’s
(2013) proposition that investments made during an economic peak have a higher failure
probability further supports the dissertation’s findings. Thus, early-stage VC deals completed
during an economic downturn performed better due to their agility, adaptability, risk-taking and
attractive valuations.
There is insufficient literature to either support or refute the secondary finding regarding the
higher performance of VC-backed businesses in the financial services sector relative to other
sectors. Since this topic is not mainly covered in the objectives of this dissertation, it is
necessary to highlight the need for further research on this finding.
7.3. Findings versus the qualitative data
The thematic analysis of the qualitative data from the semi-structured interviews in Section
(5.5) explained how the categorisation of VC deals based on their stage could vary depending
on the industry, geographic location, and other factors that define these investments. These
differences are expected to influence the findings in the studies that have shown that early-
stage VC investments can outperform later-stage investments. Furthermore, the qualitative
data revealed measuring the performance, the success or failure of VC investments would
also vary depending on the industry. Thus, this lack of universally accepted definitions further
justifies the disagreement between the findings from H1’s tests and the literature.
34
The qualitative data also revealed a significant limitation of this research since it did not
consider the potential benefit of the tax relief programs for seed and early-stage investments.
Investors in failed or loss-making early-stage businesses who meet the requirement of these
programs would be expected to reduce their actual losses significantly with the tax credits.
Ignoring the impact of tax relief on the performance of failed or not profitable early-stage VC
investments in this research might have understated the performance of early-stage VC
investments.
The diverse investment experiences of the semi-structured interview participants across the
phases of the economic cycle outlined that several factors impact the performance of early-
stage VC deals completed during an economic downturn. The qualitative data supports the
notion that the performance of early-stage VC investments would vary according to the nature
of their industries, VC funds’ strategy, LPs’ financial backing, and non-financial support.
Consequently, the finding of the superior performance of early-stage VC deals completed
during an economic downturn must be considered in line with these factors. Furthermore,
investing in early-stage businesses during a recession would not necessarily lead to superior
returns, as losses could be magnified due to their nature of higher failure probability.
7.4. Dissertation’s contribution
The primary studies of Cochrane (2005), Emott (2015), Chaplinsky and Gupta-Mukherjee
(2016), and Korteweg and Sorensen (2010) imply that early-stage VC investments are likely
to outperform later-stage investments, which aligns with the principles of the risk-return
tradeoff theory established based on the contributions of Markowitz (1952). This research
relied on the previous work of these scholars to formulate H1 reasonably and extend these
findings to the VC industry in the UK.
The first examination of H1 using the t-test of the IRR variable was unsuccessful in answering
the research question regarding the performance of the UK’s early- versus later-stage VC
deals between 2005 and 2015. However, the OLR test using the performance ranking ordinal
variable revealed no evidence supporting the likely better performance of early-stage VC
deals. Thus, the OLR test answered the dissertation’s first question with findings contradicting
the abovementioned studies.
As for H2, this research relied on the previous work of Cumming, Fleming and Schwienbacher
(2005), Wong (2002), and Nanda and Rhodes-Kropf (2013) to accurately formulate the
conjectures in this hypothesis. Again, investigating this hypothesis aimed to answer the
35
second question of this research if the expected superior performance of early-stage deals
completed during an economic downturn also applies to the UK’s VC industry.
Early-stage businesses are generally characterised by their higher agility, adaptability, and
risk-taking, giving these businesses an advantage in surviving economic downturns.
Furthermore, their lower valuations during an economic downturn would lead to achieving
attractive returns. These factors further support the propositions in H2.
The findings from the second OLR model confirmed that the performance of early-stage VC
deals completed during economic downturns in the UK was indeed better than similar deals
completed in other periods. This answer to the second question of this dissertation was in line
with the findings in the literature.
Overall, this dissertation presented four significant contributions to its topic by investigating
the performance of the UK’s early- versus later-stage VC investments and how well investing
in early-stage VC deals completed during economic downturns performs when the markets
recover. First, it comprehensively analyses the performance of the UK’s VC deals between
2005 and 2015. It follows an explanatory-sequential approach drawing on primary and
secondary sources to develop generalisable conclusions. This analysis has unravelled several
key performance patterns in the UK’s VC industry that have received little coverage in the
literature.
Second, this dissertation introduces a theoretical framework for investigating VC investment

performance based on the work of Chaplinsky and Gupta-Mukherjee (2016), Korteweg and
Sorensen (2010), and Cumming, Fleming and Schwienbacher (2005). This framework offers
a novel understanding of the UK’s VC performance in relation to the economic cycle.
Third, this dissertation makes several significant contributions to empirical research on the
performance of the UK’s VC deals. The semi-structured interviews have provided new insights
into how VC practitioners view their investment performance in a different context than the
literature. These findings have important implications for VC investors, practitioners,
entrepreneurs, start-ups, and policymakers.
Fourth, this dissertation contributes to the broader literature on the performance of VC

investments by highlighting its limitations and proposing new directions for future research
based on its findings. Contrary to other studies, this dissertation established that the UK’s
early-stage VC deals do not outperform later-stage deals and that VC investments during
economic downturns offer higher rewards. Thus, these findings lay the groundwork for other
researchers to expand on them in a more comprehensive and interdisciplinary approach.
36
8. Conclusion
It has been demonstrated in this dissertation that early-stage VC investments did not
outperform later-stage investments in the UK between 2005 and 2015. This finding challenges
previous studies that implied a better performance of early-stage VC deals. However, it is
essential to note that this finding was based on a different sample, period, and performance
metric and may not apply to other periods or regions. Another notable finding of this research
is that early-stage VC investments made during a recession performed better than similar
deals made in non-recessionary periods. This finding aligns with the literature showing that
economic downturns can present opportunities for VC investors to achieve higher returns.
8.1. Implications
This dissertation has several important implications for the VC and entrepreneurship fields.
The finding that early-stage VC deals may not necessarily be more profitable than later-stage
deals challenges the common assumption that early-stage investments are inherently riskier
and, in turn, should offer greater returns.
The findings also suggest that external factors, such as the financial crisis, can significantly
affect the performance of early-stage VC investments. Thus, this impact highlights the
importance of understanding the broader economic context in which VC investments are made
and the potential risks and opportunities that external factors may present. Furthermore, the
findings imply that the UK’s VC industry may be resilient during economic uncertainty, as early-
stage VC deals completed during the financial crisis outperformed those completed in non-
crisis periods. Therefore, this could have important implications for policymakers and investors
interested in promoting investments and innovation in the UK.
8.2. Limitations and future research
It is also important to note that this dissertation has limitations. Only the ranking of VC
investments was used to measure their performance due to the missing data in the database.
Other measures, such as IRR or cash-on-cash return, could provide different results. This
dissertation also relied on PitchBook as its only source for its quantitative data. Consequently,
using other secondary sources could have enhanced the accuracy of the sample and lowered
the impact of missing data bias on the findings of this dissertation.
37
The findings’ reliability could have also increased by cross-checking the stage classification of
the sampled deals against the literature. In addition, the generalisation of the findings would
have benefited from analysing an extended period that included other recessionary periods
than the financial crisis. Moreover, the performance of the analysed early-stage VC deals is
likely underestimated since it ignores the positive impact of the UK’s tax relief programs, which
could alter this dissertation's findings.
Considering these limitations, future research could expand the scope to account for the
missing data bias, extend the examined period, consider the impact of tax relief schemes,
analyse the performance according to business sectors, and explore additional performance
metrics. Thus, considering these recommendations would provide a more comprehensive
understanding of the UK’s VC performance and factors contributing to early-stage VC
investments' success or failure across the economic cycle.
8.3. Last remarks
To conclude, this dissertation would hopefully benefit VC practitioners, early-stage

businesses, and policymakers in the UK. Firstly, the findings suggest that early-stage VC
investments may not always be more profitable than later-stage investments and that
economic downturns may present opportunities for early-stage investors. VC practitioners
should consider increasing their exposure to early-stage businesses during economic
downturns as they offer opportunities for excess returns. However, it is essential to note that
these returns are qualified by having the necessary resources, capabilities, and investment
strategy in place to select and manage the higher risk of these investments.
Secondly, the findings may also have implications for early-stage businesses prone to higher
failure. These businesses should consider adjusting their fundraising strategies and focus on
building a solid track record of success before seeking VC funding. They also should take
advantage of opportunities presented by economic downturns to raise the needed equity funds
to launch and grow their businesses.
Lastly, policymakers should consider encouraging investors to fund early-stage businesses

by introducing new government-sponsored incentive programs parallel to the tax relief
schemes to support and promote this segment of the economy.
38
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42
Appendix 1: Ranking of Referenced Journals
AJG AJG AJG ABS

2021 2018 2015 2010
Journal of Finance 4* 4* 4* 4
Journal of Financial Economics 4* 4* 4* 4
Journal of Management 4* 4* 4* 4
Review of Financial Studies 4* 4* 4* 4
Review of Financial Studies 4* 4* 4* 4
Research Policy 4* 4* 4 4
Journal of Business Venturing 4 4 4 4
Journal of Corporate Finance 4 4 4 3
Annual Review of Financial Economics 3 3 3 3
European Economic Review 3 3 3 3
Financial Management 3 3 3 3
Journal of Banking and Finance 3 3 3 3
Journal of Institutional Economics 3 3 3 -
Small Business Economics 3 3 3 3
Socio-Economic Review 3 3 3 2
Accounting and Finance 2 2 2 2
Applied Economics 2 2 2 2
Venture Capital 2 2 2 2
Financial Markets and Portfolio Management 2 - - -
Journal of Business and Finance Librarianship - - - -
Journal of Private Equity - - - -
SSRN Electronic Journal - - - -
Table 8: Ranking of the journals referenced in this research

Source: CABS (2021)
43
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Title: Early-stage versus later-stage investments and the

Degree Course: DLMBA

Student Name: Mohammad As’ad, CFA

Dissertation Date: 14 March 2023

Word Count: 12,494

My thanks also go to the dissertation’s interview participants. To Mr Lucius Cary, I am grateful

Figure 1: Business funding life cycle ...................................................................................................................... 5

Table 1: VC target returns across the different financing stages ............................................................................ 8

While developing a universal definition of early- or later-stage VC investments may be

It is also challenging to separate the various forms of entrepreneurial finance by business

This research particularly investigates the performance of early-stage VC investments, given

Question 1: Do early-stage VC investments outperform later-stage investments in the

Question 2: How does an economic downturn affect the performance of early-stage

2.1. Literature review purpose

Ideation Early Later Maturity

Valley of Breakeven Time

Figure 1: Business funding life cycle

2.3. How VC works

2.4. Risk and return in the VC context

(Cochrane, 2005, p.5)

Table 1: VC target returns across the different financing stages

2.5. Strategies, performance, and the economic cycle

H2: In the UK, VC-backed investments in early-stage businesses completed during an

4.1. Data collection methodology

This research follows an explanatory-sequential approach in which the researcher employs

4.3. Evaluation and limitations

5.1. Sample description

GDP % change (QoQ)

Deals Value (millions)

Bankruptcy IPO M&A Not Exited

Early-stage Later-stage Combined

Figure 4: Exits breakdown of the sampled deals

5.2. Primary variables

Table 2: Description of the research variables

5.3. Control variables

Count Missing Mean St Dev Min. Max. Skewness Kurtosis

IRR log (IRR+1) Ranking Early-stage Later-stage GDP Industry

5.5. Qualitative data

i. Categorising VC investments based on their stage

ii. Defining the success and failure of VC investments

The limitation of having a universal definition of VC investment performance also applies to

iii. Considering risk relative to the funding stage

iv. Evaluating VC investments completed in a recession

6.1. IRR: early- versus later-stage

Statistics Early-stage Later-stage t-test results Value

Table 5: t-test of log (IRR+1), early-stage versus later-stage

6.2. Ranking: early- versus later-stage

Response information Count % Measures of association Value

Linearity and model fit Value p-value

6.3. Early-stage VC deals during a recession

Odds 95% CI 95% CI

Response information Count % Measures of association Value

Linearity and model fit Value p-value

7.1. Summary of the findings

7.2. Findings versus the literature

Furthermore, as discussed earlier, multiple scholars considered early-stage VC deals riskier,

7.3. Findings versus the qualitative data

7.4. Dissertation’s contribution

Second, this dissertation introduces a theoretical framework for investigating VC investment

Fourth, this dissertation contributes to the broader literature on the performance of VC

8.2. Limitations and future research