Investment Cycles and Startup Innovation

57 Pages Posted: 29 Oct 2011 Last revised: 29 Jul 2014

See all articles by Ramana Nanda

Ramana Nanda

Harvard University - Entrepreneurial Management Unit

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2012

Abstract

We find that VC-backed firms receiving their initial investment in hot markets are more likely to go bankrupt, but conditional on going public are valued higher on the day of their IPO, have more patents and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is particularly true for the most experienced VCs. Furthermore, our results suggest that the flood of capital in hot markets also plays a causal role in shifting investments to more novel startups – by lowering the cost of experimentation for early stage investors and allowing them to make riskier, more novel, investments.

Keywords: Venture Capital, Innovation, Market Cycles, Financing Risk

JEL Classification: G24, G32, O31

Suggested Citation

Nanda, Ramana and Rhodes-Kropf, Matthew, Investment Cycles and Startup Innovation (December 10, 2012). Harvard Business School Entrepreneurial Management Working Paper No. 12-032. Available at SSRN: https://ssrn.com/abstract=1950581 or http://dx.doi.org/10.2139/ssrn.1950581

Ramana Nanda (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

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

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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