Investment Cycles and Startup Innovation

Nanda, Ramana; Rhodes-Kropf, Matthew

doi:10.2139/ssrn.2024401

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Investment Cycles and Startup Innovation

36 Pages Posted: 19 Mar 2012

See all articles by Ramana Nanda

Ramana Nanda

Imperial College Business School; Harvard University - Entrepreneurial Management Unit

Matthew Rhodes-Kropf

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

There are 2 versions of this paper

Date Written: January 15, 2012

Abstract

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

Nanda, Ramana and Rhodes-Kropf, Matthew, Investment Cycles and Startup Innovation (January 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024401 or http://dx.doi.org/10.2139/ssrn.2024401