Technological Disruptiveness and the Evolution of IPOs and Sell-Outs

Abstract

We show that the recent decline in IPOs in U.S. markets is explained by changes in the technological disruptiveness of startups, which we measure using textual analysis of patents from 1930 to 2010. We focus on startups backed by venture capital and show that startups with disruptive technologies are more likely to exit via IPO and are less likely to exit via sell-out. This is consistent with IPOs being favored by firms with the potential to carve out independent market positions with strong defenses against rivals. We document an economy-wide trend of declining technological disruptiveness since World War II that accelerated since the late 1990s. These trends predict fewer IPOs and more sell-outs, and we find that 20% to 60% of the recent dearth of IPOs, and 55% of the surge in sell-outs, can be attributed to changes in firms' technological characteristics.

Keywords: Initial Public Offerings (IPOs), Acquisitions, Sell-Outs, Technology, Disruptiveness, Venture Capital

JEL Classification: G32, G34, G24