Effects of venture debt on early- and late-stage funding of tech startups in tech ecosystems

Venture debt has emerged as a critical yet understudied component of entrepreneurial finance in tech startup ecosystems. This paper investigates how the availability of venture debt influences the allocation of equity funding between early- and late-stage technological startups across 59 countries from 2015 to 2024, from which venture debt data are sparse, with robust series available for only 15 countries. Using a Panel Vector Autoregression (PVAR) framework, we examine dynamic inter-dependencies between funding instruments while controlling for national-level knowledge intensity, economic development, and political stability. Our findings reveal a consistent substitution effect: increased venture debt availability is associated with reduced early-stage equity funding, but enhance late-stage investments. The aggregate effect is positive in all the models suggesting that venture debt contributes to the effectiveness and efficiency of finance in the tech start-up ecosystems. The apparent redistribution of capital across the startup lifecycle, potentially accelerates scale-up trajectories while offering a more efficient funding mode for early-stage companies. These dynamics have important implications for innovation policy, especially in ecosystems seeking to balance risk-sharing, capital efficiency, and sustained entrepreneurial support. We argue that venture debt should not be treated as a passive supplement to equity, but as a strategic financial tool whose design and regulation can reshape innovation pathways. Summary Assessing the effectiveness and efficiency of venture debt in financing national tech ecosystems. We use a Panel VAR approach testing the effect of venture debt on early- and late-funding in a sample of 59 countries. The analysis comprises data from 2015 to 2024. Venture debt enhances the effectiveness and efficiency of the financial system in that it substitutes early-stage investments at a rate of about one-to-two, and increases late-stage investment one-to-four. We interpret this as a reallocation of early-stage capital to late-stage capital, enhancing the success rate of startups. This occurs because venture debt is more cost-effective for both founders and lenders in the early stage—extending runway and enabling milestone progression without initiating new valuation events—while at later stages it mitigates dilution pressure and provides a comparatively lower-cost source of scale-up capital. Policymakers must be aware that venture debt is a strong strategic instrument, while these findings also hint at the importance of diversity in financial instruments to national tech ecosystems. This is one of the first studies inquiring into ecosystem level effects of the venture debt on equity financing.