Financing the startup J

High-growth startups often lose money before they make it. Building a product, hiring a team, entering new markets, and acquiring customers can require sustained spending before revenues catch up. The resulting cash-flow trajectory is commonly described as a J-curve: operating losses deepen during the investment phase and recover only if the company succeeds in scaling.

Whether a startup can pursue this path depends on more than the quality of its idea. It also depends on whether its investors can finance the company through the loss-making phase. A startup may abandon a valuable long-horizon growth strategy if future funding is uncertain. This financing risk is especially relevant in the venture capital (VC) industry, where capital is staged across rounds and current investors may be unable or unwilling to supply all subsequent funding (Nanda and Rhodes-Kropf 2013, 2017).

This distinction matters for Europe’s scale-up debate. The problem is not only how much VC funding is available, but whether investors can make large investments, finance follow-on rounds, and attract later-stage capital. Fratto et al. (2024) count 137 VC funds larger than $1 billion in the US between 2013 and 2023, compared with 11 in the EU and ten in the UK. In a recent paper (Hellmann et al. 2026), we examine whether differences in financing capacity are reflected in the cash flow and growth trajectories of startups.

Our setting is Sweden, which combines an active VC market with unusually detailed accounting data. We use financial statements for the population of Swedish limited liability companies from 1998 to 2023, merged with VC transactions from PitchBook, Crunchbase, and VentureXpert.

Sweden is useful because US and non-US venture capitalists invest in the same institutional environment. This holds country-level regulation and macroeconomic conditions constant. The matched sample contains 489 startups, including 125 that receive their first US VC investment. The investment events occur between 2000 and 2020.

US venture capitalists do not invest randomly. We therefore combine matching with a stacked difference-in-differences design. For each investment year, we match startups receiving their first US VC investment to startups receiving non-US VC funding in the same year and with similar industry, funding stage, EBITDA, and employment in the preceding year. We then compare outcomes from four years before to seven years after the investment.

The identifying assumption is that, absent the first US VC investment, the two groups would have followed parallel outcome paths. The matched companies are balanced on a broad set of pre-investment financial and managerial characteristics. Pre-investment outcome paths are also broadly similar. Our empirical design reduces, but cannot fully eliminate, concerns about selection. Time-varying unobservables, such as latent growth plans or entrepreneur preferences, remain the main threat. We interpret the estimates as post-investment differences associated with US VC backing rather than as the result of a random assignment of investors.

US VC-backed startups ride deeper J-curves

J-curves are a pervasive feature of VC-backed startups. In our data, 80% of company-year observations have negative operating cash flow. VC funding permits startups to sustain these losses while pursuing future growth, but the depth and duration of the losses differ markedly across investors.

We document three main patterns. First, startups backed by US venture capitalists experience substantially deeper operating losses after investment. Averaged over the post-investment period, cash from operations is SEK 12.9 million lower than for matched startups backed by non-US investors. The gap widens gradually, reaching about SEK 26 million in year five, before narrowing.

Second, the deeper losses are followed by higher sales. The difference is not immediate. It becomes visible around the third year after investment and grows thereafter. Averaged over the post-investment period, sales are 0.51 log points, or approximately 67%, higher among US VC-backed startups.

Third, US VC-backed startups receive substantially more capital. VC funding is about 129% higher after the investment, reflecting both a larger initial injection and greater follow-on financing. Complementary measures show that US VC-backed startups return to the funding market sooner, expand more rapidly abroad, raise more follow-on rounds, and are more likely to exit successfully.

These results document a joint pattern: more financing, deeper interim losses, and stronger subsequent growth. This pattern is consistent with US venture capitalists enabling startups to pursue scaling strategies that would be difficult to finance under tighter constraints. 

Figure 1 Outcomes around the first US VC investment

Financing capacity: Fund size and investor networks

Why are US VC-backed startups able to remain on deeper J-curves? We examine two margins of financing capacity: access to internal capital and access to external capital through investor networks.

The clearest investor difference is size. The US VC syndicates in our sample manage, on average, SEK 37.3 billion more than non-US syndicates. Large funds can make bigger initial investments and reserve more capital for later rounds. This leads to a simple prediction: if US origin mainly proxies for financing capacity, the US and non-US difference should shrink when both investor groups are large.

This is what we find. Among startups backed by large VC firms, the post-investment differences in operating cash flow and sales largely disappear. Among startups backed by smaller VC firms, the US pattern re-emerges with a delay. Operating losses begin to deepen around year three, at roughly the same time as funding and sales begin to diverge. This timing suggests that smaller US investors may initially face internal constraints but are better able to connect their portfolio companies to later-stage capital.

The network evidence is consistent with this interpretation. Across the full sample, US VC-backed startups attract 134% more new investors after the initial investment. The timing is especially informative among smaller venture capitalists: new investors arrive progressively, and the increase accelerates around the time the delayed J-curve emerges. Much of the additional investor entry comes from outside the original syndicate’s prior network, including new large investors.

Additional tests point toward financing capacity rather than US origin per se. Among startups that never receive US capital, investment by a large non-US VC produces a similar combination of deeper losses, higher sales, and more funding, whereas investor experience, prior success, foreign status, or prior ties to US VCs do not. These mechanism results require stronger assumptions than the baseline design because startups may sort into large or well-connected investors on unobservables. We therefore view them as converging evidence on financing capacity, rather than causal estimates of fund size or networks. 

Figure 2 New investors after the first US VC investment

Implications for European scale-up policy

The findings suggest that early-stage and scale-up finance address different problems. Broadly distributed early-stage capital can support experimentation and entrepreneurial entry. Scale-up finance instead requires large, repeated commitments to startups whose growth strategies generate substantial losses before revenues materialise. This argues for a stage-contingent policy architecture: early-stage programmes can remain relatively decentralised, while later-stage capital should be pooled sufficiently to permit large cheques and credible follow-on commitments. Evaluation should correspondingly emphasise follow-on funding, sales growth, international expansion, and exits rather than simply the number of initial investments.

The Scaleup Europe Fund illustrates this approach. The public-private vehicle targets approximately €5 billion, anchored by a €1 billion commitment from the European Commission, and is intended to support growth-stage investments of €100 million or more, including follow-on investments (European Commission 2026). Its relevant test is whether it mobilises additional private capital and provides credible continuity of finance, not simply whether it deploys its initial commitment. Independent, market-based management and transparent governance are important safeguards against crowding out private capital or allocating funds for political reasons.

Fund size is not the only route to financing capacity. Smaller investors can support long growth paths if they can bring in later-stage capital. Policies that reduce barriers to cross-border syndication, connect early-stage and later-stage investors, or facilitate institutional participation in follow-on vehicles may therefore expand effective financing capacity (Bradley et al. 2019).

Continuity of financing should not be confused with unconditional continuation. A high burn rate can reflect productive investment, but it can also reflect inefficient spending or delayed restructuring. Policy should not reward losses in isolation. Continued financing should remain conditional on credible growth milestones, and evaluation should consider losses jointly with sales, international expansion, follow-on funding, and exits.

Venture capital is often described as a source of money and advice. Our results point to a third function: the ability to sustain financing over time. US VC-backed Swedish startups experience deeper operating losses, receive more follow-on capital, and achieve higher subsequent sales. These differences are closely related to investors’ financing capacity.

For Europe, the implication is not simply to provide more VC funding, but to ensure that promising startups can access sufficiently deep pools of capital and investor networks to finance long-horizon scaling strategies. Continuity of finance, however, should remain conditional on credible growth.

Bradley, W A, G Duruflé, T F Hellmann, and K E Wilson (2019), “Cross-border venture capital investments: What is the role of public policy?”, Journal of Risk and Financial Management 12: 112.

Draghi, M (2024), The future of European competitiveness: Part A, European Commission.

European Commission (2026), “Scaleup Europe Fund”.

Fratto, C, M Gatti, A Kivernyk, E Sinnott, and W van der Wielen (2024), The scale-up gap: Financial market constraints holding back innovative firms in the European Union, EIB Thematic Studies.

Hellmann, T, A Montag, and J Tåg (2026), “Financing J-curves in venture capital”, Review of Finance, forthcoming.

Nanda, R, and M Rhodes-Kropf (2013), “Investment cycles and startup innovation”, Journal of Financial Economics 110(2): 403-418.

Nanda, R, and M Rhodes-Kropf (2017), “Financing risk and innovation”, Management Science 63(4): 901-918.