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Investment Cycles and Startup Innovation

Author

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  • Ramana Nanda

    (Harvard Business School, Entrepreneurial Management Unit)

  • Matthew Rhodes-Kropf

    (Harvard Business School, Entrepreneurial Management Unit)

Abstract

We find that VC-backed firms 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 IPO, 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 the flood of capital in hot markets also 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.

Suggested Citation

  • Ramana Nanda & Matthew Rhodes-Kropf, 2011. "Investment Cycles and Startup Innovation," Harvard Business School Working Papers 12-032, Harvard Business School, revised Dec 2012.
    • Handle: RePEc:hbs:wpaper:12-032
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    More about this item

    Keywords

    Venture Capital; Innovation; Market Cycles; Financing Risk;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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