Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation

Howell, Sabrina T; Lerner, Josh; Nanda, Ramana; Townsend, Richard

doi:10.2139/ssrn.3594239

Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation

Harvard Business School Entrepreneurial Management Working Paper No. 20-115

50 Pages Posted: 7 May 2020 Last revised: 5 Oct 2020

See all articles by Sabrina T Howell

Sabrina T Howell

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Ramana Nanda

Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management

There are 2 versions of this paper

Date Written: October 1, 2020

Abstract

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

Howell, Sabrina T and Lerner, Josh and Nanda, Ramana and Townsend, Richard, Financial Distancing: How Venture Capital Follows the Economy Down and Curtails Innovation (October 1, 2020). Harvard Business School Entrepreneurial Management Working Paper No. 20-115, Available at SSRN: https://ssrn.com/abstract=3594239 or http://dx.doi.org/10.2139/ssrn.3594239