Venture Capital and the Invention to Innovation Transition

Abstract

Entrepreneurial innovation involves turning embryonic inventions into marketable innovations through costly technology development. Do venture capitalists (VCs) target their funding and managerial efforts to technology development or do they support later stages of the innovation cycle involving mostly commercialization? To answer this question we merge a list of first-round venture capital (VC) investments with an innovation survey of Spanish companies. We document changes in the innovative activity of VC-backed firms around first round VC investments which suggest that VCs fund technology development. First, the composition of R&D shifts from basic research to technology development. Second, the financing structure of R&D shows a greater reliance of external funds. Third, improved access to external funds reduces the intensity of financial constraints as an obstacle to innovation. Fourth, there is a slowdown in patenting and invention. Fifth, there is a substantial increase in the share of innovative sales.

Keywords: Venture Capital, Invention, Innovation, Technology

JEL Classification: G24, O31, O32, O38