How Resilient is Venture-Backed Innovation? Evidence from Four Decades of U.S. Patenting

46 Pages Posted: 7 May 2020 Last revised: 5 Oct 2023

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Private Capital Research Institute

Ramana Nanda

Imperial College Business School; Harvard University - Entrepreneurial Management Unit

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management

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Date Written: July 2023

Abstract

Despite theoretical predictions to the contrary, corporate innovation is strongly pro-cyclical. In this paper, we compare innovation in the economy as a whole to that of firms backed by venture capital (VC), a source of capital associated with the most impactful young firms. We show that (1) patents filed by VC-backed firms are of significantly higher quality and economic importance than those in the broader economy, (2) venture-backed innovation is even more procyclical than innovation in general, and (3) that the deterioration of venture innovation in downturns appears driven by shifts in the types of startups that these investors finance. Our findings suggest that during recessions, venture capitalists perceive a need to conserve capital both due to demand for financing from struggling companies already in their portfolios and due to a more challenging fundraising environment. Therefore, they shift funding to less innovative firms that are closer to profitability. Rather than countering the pro-cyclicality of innovation in the broader economy, VC finance appears instead to amplify this pattern.

Keywords: Patents, Business Cycles, Recessions

JEL Classification: G24, O31

Suggested Citation

Howell, Sabrina T and Lerner, Josh and Nanda, Ramana and Townsend, Richard, How Resilient is Venture-Backed Innovation? Evidence from Four Decades of U.S. Patenting (July 2023). Harvard Business School Entrepreneurial Management Working Paper No. 20-115, Available at SSRN: https://ssrn.com/abstract=3594239 or http://dx.doi.org/10.2139/ssrn.3594239

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
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212-998-0913 (Phone)

HOME PAGE: http://www.sabrina-howell.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Josh Lerner (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Harvard University - Private Capital Research Institute ( email )

114 Western Ave
Allston, MA 02134
United States

Ramana Nanda

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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