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Venture Capital, Patenting, and Usefulness of Innovations

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  • Fabrizi, Simona
  • Lippert, Steffen
  • Norbäck, Pehr-Johan
  • Persson, Lars

Abstract

We analyze incentives to develop entrepreneurial ideas for venture capitalists (VCs) and incumbent firms. If VCs are sufficiently better at judging an idea's value and if it is sufficiently more costly to patent low than high value ideas, VCs acquire valuable ideas, develop them beyond the level incumbents would have chosen, and use patents to signal their companies' high value to acquirers prior to exiting. This increases the VC-backed companies' patenting intensity and long-run performance, but also infl ates their acquisition prices, and lowers their acquirers' overall profits. Patent law usefulness clauses would reduce such excessive, signaling-driven investment and patenting intensity.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8392.

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Date of creation: May 2011
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Handle: RePEc:cpr:ceprdp:8392

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Keywords: innovation; patent law; patenting intensity; preemptive vs late acquisition strategies; signaling; usefulness requirement; venture capital;

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Cited by:
  1. Francis Bloch & Simona Fabrizi & Steffen Lippert, 2011. "Learning and Collusion in New Markets with Uncertain Entry Costs," Working Papers 1112, University of Otago, Department of Economics, revised Dec 2011.
  2. Norbäck, Pehr-Johan & Persson, Lars & Tag, Joacim, 2012. "Buying to Sell: Private Equity Buyouts and Industrial Restructuring," CEPR Discussion Papers 8992, C.E.P.R. Discussion Papers.

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