To Be Financed or Not… - The Role of Patents for Venture Capital-Financing

Abstract

In the presence of asymmetric information, economic agents need to communicate their quality to investors and other parties. While much of the literature focuses exclusively on signaling, we develop a conceptual framework that extends this view with elements of the literature on certification. We derive and test empirically several hypotheses using a sample of British and German companies that seek venture capital (VC). We find that patent applications – as signals from ventures – are positively related to VC-financing. Moreover, applications trigger institutionalized processes at the patent office, which can generate valuable technological and commercial information via search reports, citations and opposition procedures and thus affect VC-financing. Our results highlight the role of signaling, but additional information about venture quality is generated via an institutionalized certification process.

Keywords: signaling, certification, liabilities of newness, venture capital, patent system, biotechnology

JEL Classification: G24, L20, L26, O30, O34