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Investment cycles and startup innovation

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  • 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.

Suggested Citation

  • Nanda, Ramana & Rhodes-Kropf, Matthew, 2013. "Investment cycles and startup innovation," Journal of Financial Economics, Elsevier, vol. 110(2), pages 403-418.
    • Handle: RePEc:eee:jfinec:v:110:y:2013:i:2:p:403-418
    DOI: 10.1016/j.jfineco.2013.07.001
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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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