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

Abstract

We study the determinants of startup exit methods using novel measures of technological characteristics constructed from patent text. Our main result is 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 suggest that IPOs are 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 disruptive potential between 1930 to 2010, which can explain roughly 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