News

In a new white paper, Analysis Group affiliate and Harvard Business School Professor Joshua Lerner examines how changes in electronic privacy policy have affected venture capital (VC) investment in online advertising companies. In “The Impact of Privacy Policy Changes on Venture Capital Investment in Online Advertising Companies,” Professor Lerner, an authority on the impact of intellectual property protection policies on growth and high technology, discusses the effect of the European Union’s Privacy and Electronic Communications Directive on VC investment in online advertising companies. The directive regulates the electronic collection and use of personal data in the EU. In the paper, Professor Lerner—building off his hypothesis that the directive has reduced VC investment in EU-based businesses that use such data—reviews and cites a substantial body of literature analyzing the relationship between property rights and innovation.

Supported by an Analysis Group team that included Managing Principals Lau Christensen, T. Christopher Borek, and Rebecca Kirk Fair, Vice President Peter Hess, and Manager Greg Rafert, Professor Lerner constructed a data set reflecting VC investment in online advertising companies and estimated multiple “difference-in-difference” regression models designed to test for a statistically significant decrease in VC investment in EU online advertising companies after the passage of the directive. (These econometric models measure the impact of an event at a given period in time, controlling for other factors.)

The team found that venture funding appears to have a strong positive impact on innovation and job creation. Their results also suggest that the EU privacy directive “has led to an incremental decrease in investment in EU-based online advertising companies of approximately $249 million over the approximately eight-and-a-half years from passage through the end of 2010. When paired with the findings of the enhanced effects of VC investment relative to corporate investment, this may be the equivalent of approximately $750 million to $1 billion in traditional R&D investment.”

Read the white paper 

Read the related research paper, "The Impact of Copyright Policy Changes on Venture Capital Investment in Cloud Computing Companies"