Technological Disruptive Potential and the Evolution of IPOs and Sell-Outs

Abstract

We study the determinants of startups' choice of exit using novel measures of startups' technological characteristics constructed from patent text. We show that startups with more potential to disrupt technological areas are 25% more likely to exit via IPO and 19% less likely to sell-out. These results are consistent with IPOs being favored by startups that can carve out independent market positions, avoiding the need to share gains with an acquirer. We document an economy-wide decline in patents' disruptive potential between 1930 to 2010, and show that this trend explains about 20% of the recent decline in IPOs, and 50% of the surge in sell-outs.

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

JEL Classification: G32, G34, G24