Study finds tax incentives change how venture capitalists invest in startups

In 2026, venture capital (VC) funding to startups is projected to land at $1 trillion. Even with the staggering amount of funding already flowing into startups, new research finds that tax incentives designed to encourage startup investment fundamentally change how VC firms invest and choose which companies to fund.

The University of Florida Warrington College of Business study found that when capital gains tax incentives are available, VC firms become more willing to fund earlier-stage, riskier startups that are more likely to fail but also more likely to achieve higher exit valuations. 

The paper’s findings are already impacting policy discussions, including those in the U.S. Congress, as they were recently cited in the 2026 Joint Economic Report as evidence that tax incentives can influence entrepreneurial investment and innovation. 

“Our study is the first to show that tax policy can shift entrepreneurial financing toward riskier, more innovative and valuable startups,” said Murillo Campello, study co-author and Joe B. Cordell Eminent Scholar. “Tax incentive critics have argued that these programs have primarily benefited sophisticated investors who would have funded ventures regardless, but our evidence suggests a more nuanced picture.”

The findings suggest that tax policy can influence more than how much funding flows to startups. It can also affect which companies receive funding and where investors direct their money. Campello and Warrington Ph.D. student Guilherme Junqueira (Ph.D. ‘28) found that tax incentives encourage VCs to shift investment toward more innovative industries, ultimately leading these startups to produce more impactful patents. 

The researchers studied more than 158,000 investor-startup relationships spanning two decades using changes to the federal Qualified Small Business Stock (QSBS) program, which exempts qualified startup investments from capital gains taxes, to compare how different types of investors responded. 

When looking across VCs, angel and corporate investors, the study found that VCs became more likely to invest in pre-commercial startups, provide a company’s first round of funding and invest without syndicating deals when tax incentives applied. Those tax-advantaged investments were more likely to fail, but those that were successful achieved higher exit valuations and were more likely to become “unicorn” companies, valued at over $1 billion.  

Comparable angel and corporate investors exposed to the same tax incentives did not show similar changes, the researchers noting that this investor behavior is uniquely concentrated among venture capitalists. 

Overall, the findings suggest that tax policy can help overcome financing frictions, or the barriers that make it harder for promising startups to secure funding, by encouraging VC firms to fund promising ventures that could otherwise go unfunded.

The research also contributes to ongoing policy discussions about economic effects of startup tax incentives. In addition to being cited in the 2026 Joint Economic Report, it was presented at or is scheduled for seminars at the Bank of England, the Federal Reserve Board, the University of Cambridge and the National University of Singapore.

The paper has already been presented at several academic conferences, with 20 in total scheduled, including four National Bureau of Economic Research meetings, the SFS Cavalcade, the European Finance Association, and received the Best Paper award at the Spanish Finance Association’s 32nd Finance Forum.

“Tax benefits effectively expand the frontier of entrepreneurial investment by encouraging VCs to take calculated risks on promising companies, creating opportunities for innovation that can extend beyond the companies receiving the investment,” Campello said.

The working paper, “Tax Incentives and Venture Capital Risk-Taking: Evidence from the QSBS Program,” is available at the National Bureau of Economic Research.