The effect of venture capital backing on innovation in newly public firms

Abstract

We study the effect of VC-backing on innovation in newly public firms and find that it is negatively related to patents produced and citations received within the initial years following an IPO - our estimates indicate that VC-backed firms produce 13% fewer patents than nonVC-backed firms within the first year post-IPO. Our findings suggest that this adverse effect is a consequence of VCs timing their portfolio companies' IPOs at the peak of innovation followed by a decline post-IPO. Additionally, VC-backing leads to higher growth in sales and productivity in newly public firms pointing to a shift in VC focus from creating into commercializing innovation post-IPO. We address endogeneity concerns with an instrumental variables approach.