Working Paper: CEPR ID: DP5449
Authors: Pehr-Johan Norbäck; Lars Persson
Abstract: Exit of venture-backed firms often takes place through sales to large incumbent firms. We show that in such an environment, venture-backed firms have a stronger incentive to develop basic innovations into commercialized innovations than incumbent firms, due to strategic product market effects. This will increase the price for basic innovations, thereby triggering more such innovations by entrepreneurs. Consequently, a venture capital market implies that more innovations are created, and that these become better developed. Moreover, we show that to exist in equilibrium, venture capitalist must be substantially more efficient, otherwise incumbents will preempt venture capitalists entering the market by acquiring basic innovations
Keywords: acquisitions; entrepreneurship; innovation; venture capital
JEL Codes: G24; L1; L2; M13; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Venture Capitalists (G24) | Venture-Backed Firms (G24) |
| Venture-Backed Firms (G24) | Commercialized Innovations (O36) |
| Venture Capitalists (G24) | Acquisition Price for Innovations (O36) |
| Acquisition Price for Innovations (O36) | Entrepreneurial Effort to Innovate (O35) |
| Venture Capitalists (G24) | Innovation Efforts by Entrepreneurs (O35) |
| Venture Capitalists Efficiency (G24) | Venture Capitalists (G24) |
| Venture Capitalists Efficiency (G24) | Incumbents (G18) |
| Incumbents (G18) | Preemptive Acquisition of Innovations (O36) |
| Venture Capitalists (G24) | Innovation Levels (O31) |
| Innovation Levels (O31) | Economic Growth (O49) |