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Investment Cycles and Startup Innovation

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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.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 12-032.

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Length: 57 pages
Date of creation: Oct 2011
Date of revision: Dec 2012
Handle: RePEc:hbs:wpaper:12-032

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Keywords: Venture Capital; Innovation; Market Cycles; Financing Risk;

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References

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  12. 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 Agrawal & Christian Catalini & Avi Goldfarb, 2013. "Some Simple Economics of Crowdfunding," NBER Chapters, in: Innovation Policy and the Economy, Volume 14, pages 63-97 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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