How does venture capital syndication spur innovation? Evidence from French biotechnology firms

This paper analyzes the effects of venture capital (VC) financing on the innovation performance of high-tech firms, mainly through the syndication strategy. While prior studies have provided very little evidence about how VC syndication impacts the patenting output of these firms, we investigate how the patenting activity of high-tech investee firms may be explained by the characteristics of syndicate members in VC deals. This empirical analysis involves panel data covering 1,122 observations related to French biotechnology firms over the eleven-year period from 1998 to 2008. The findings suggest that biotechnology firms are more significantly and positively affected by the presence of venture capital firms (VCF) than by any other source of financing. Importantly, a higher patenting activity is positively associated with venture capital financing when investors engage in syndication. The firm?s level of patent applications is more likely to be higher when the VC syndicate partners are industry specialists, affiliated (or captive) investors, or share complementary skills. We also underscore the role of geographical proximity between VC syndicate partners and their investees. Syndication in VC financing appears to be a relevant and significant mechanism that enhances the innovation outcome of biotechnology firms.