Investment Cycles and Startup Innovation
36 Pages Posted: 19 Mar 2012
Date Written: January 15, 2012
We find that VC-backed firms receiving their initial investment in hot markets are less likely to IPO, 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 true even 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: Suggested Citation