Can tax incentives prompt investors to back riskier ventures? We answer this question under a conceptual framework where venture capitalists combine outside funding with incentive-based compensation and empirically examine a policy that eliminated capital gains taxes on certain startup investments. Using a triple-difference design exploiting industry eligibility rules, investment entry year, and holding period requirements, we analyze data from 194 thousand investor–firm pairings over two decades. When venture capitalists’ investments qualify for tax benefits, they shift toward riskier bets: their portfolio companies are 20% more likely to be pre-revenue, 15% more likely to have fewer than 50 employees, 69% more likely to go out of business, and twice as likely to face funding gaps exceeding five years. This increased risk-taking generates salient outcomes: tax-advantaged investments are 23% more likely to achieve unicorn status (valuation above $1 billion), with venture capitalists becoming 129% more likely to exit through private equity buyouts, while 45% less likely to pursue strategic sales. Using detailed data on board voting rights, executive turnover, and exit multiples, we show that tax effects operate through risk-taking rather than enhanced monitoring or value added. Our results show that tax policy can shift capital toward more experimental ventures, with outcomes shaped by investor organizational structure and incentives.
Murillo Campello, University of Florida & NBER
Guilherme Junqueira, University of Florida