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Investment cycles and startup innovation

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Author Info

  • Nanda, Ramana
  • Rhodes-Kropf, Matthew

Abstract

We find that venture capital-backed startups receiving their initial investment in hot markets are more likely to go bankrupt, but conditional on going public, are valued higher on the day of their initial public offering, have more patents, and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is particularly true for the most experienced VCs. Furthermore, our results suggest that increased capital in hot times plays a causal role in shifting investments to more novel startups by lowering the cost of experimentation for early stage investors and allowing them to make riskier, more novel, investments.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 110 (2013)
Issue (Month): 2 ()
Pages: 403-418

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Handle: RePEc:eee:jfinec:v:110:y:2013:i:2:p:403-418

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Venture capital; Innovation; Market cycles; Financing risk;

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References

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  7. Nanda, Ramana, 2010. "Entrepreneurship and the Discipline of External Finance," Working Papers 10-10, University of Aarhus, Aarhus School of Business, Department of Economics.
  8. Ramana Nanda & Matthew Rhodes-Kropf, 2012. "Innovation and the Financial Guillotine," Harvard Business School Working Papers 13-038, Harvard Business School, revised Dec 2012.
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Cited by:
  1. Ajay K. Agrawal & Christian Catalini & Avi Goldfarb, 2013. "Some Simple Economics of Crowdfunding," NBER Working Papers 19133, National Bureau of Economic Research, Inc.
  2. Hsu, Po-Hsuan & Tian, Xuan & Xu, Yan, 2014. "Financial development and innovation: Cross-country evidence," Journal of Financial Economics, Elsevier, vol. 112(1), pages 116-135.

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