Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation
50 Pages Posted: 7 May 2020 Last revised: 5 Oct 2020
Date Written: October 1, 2020
By comparing patenting among VC-backed firms to the universe of patents filed in the USPTO over the period 1976-2019, we document that while patents filed by VC backed firms are of significantly higher quality and economic importance than the average patent, VC-backed innovation is substantially more procyclical than the broader economy. This is driven early-stage startups, whose innovation in recessions is relatively less cited, less original, less general, and less related to fundamental science. Frictions in capital supply help to explain these results.
Keywords: Venture Capital, Innovation, Patents, Business Cycles, Recessions
JEL Classification: G24, O31
Suggested Citation: Suggested Citation