VC investment more effective for fintech start-ups than credit availability
Venture capital availability has a greater impact on the formation of new fintech start-ups than credit availability from banking institutions in countries with a strong fintech scene, according to new research from Vlerick Business School.
The researchers found that one standard deviation increase in venture capital availability increased the number start-ups formed the next year by 26% for an average country. Meanwhile, one standard deviation increase in credit availability from banks increased the number of start-ups formed the next year by 12.5% for an average country.
Interestingly however, the confidence band of the effect of credit availability is generally much larger than the confident band around the effect of VC availability, despite it being less effective at stimulating new fintech start-ups.
These findings come from research by David Veredas, professor of finance and sustainability at Vlerick Business School, alongside Dr. Dimitrios Kolokas, doctoral researcher at Vlerick, as well as colleagues from Carlson School of Management and University of Exeter Business School.
The professors wanted to understand how countries can stimulate entrepreneurship growth in new, emerging industries and whether venture capital (VC) and credit markets affect fintech entrepreneurship in differently in each country.
To do so, the researchers reviewed fintech entrepreneurship data across 53 countries, for the years 2009-2017. The researchers reviewed the investment at a country-level in both venture capital for fintech start-ups, as well as credit availability, and then reviewed the impact this had on start-up formations the following year.
They also concluded that fintech investment initiatives were much more effective in countries that already have a high-level of fintech entrepreneurs. In fact, in countries where there were low levels of fintech start-ups a one-unit increase in the VC availability index created a 25.2% increase in the number of fintech start-up formations the following year. Whereas a one-unit increase in the VC availability index in countries with high levels of fintech start-ups created an 62.6% increase in the number of fintech start-up formations the following year.
Professor David Veredas says, “The availability of investment for entrepreneurs is a vital tool for countries to increase their innovation, and thus increase both the productivity and GDP in turn for a country. New and emerging sectors, like fintech, can act as a new industry to spawn large numbers of new start-ups, and thus it is important for countries to look for effective ways to invest in these.
This research shows that clearly utilising VC investment is a key approach to doing so, but countries with little current fintech investment must catch-up, as the statistics show that firms with little current investment in this area could easily be left behind.”
The findings from this study have huge implications for policymakers round the world, say the researchers, with countries actively looking for effective ways to boost national innovation.
The researchers suggest that the findings showcase the importance of investment from both venture capital firms, as well as credit availability, in order to promote fintech entrepreneurship, and wider emerging industries entrepreneurship, in each all countries.
