The diminishing signaling value of patents between early rounds of venture capital financing
By S. Hoenen, Christos Kolympiris, Wilfred Schoenmakers, Nicholas G. Kalaitzandonakes. 2014
168 citations recorded by the source corpus.
A long stream of research has documented the positive effects that patents bring about to emerging firms in high technology industries. The general consensus is that patents contribute to firm growth because they confer monopolistic market rights, offer protection from competitors, increase the negotiating position of patent holders and other benefits. What has received relatively less attention in the literature is whether patents act as a signal that attracts investors such as venture capital firms. The handful of studies that have addressed that question has not analyzed whether the signaling function of patents decreases after the initial attraction of venture capital, as information asymmetries between investors and target firms reduce. In this study we hypothesize that patent activity has a signaling value that diminishes once information asymmetries between investors and funded firms lessen. To study our proposition we draw upon a longitudinal dataset of more than 580 U.S.-based biotechnology firms to empirically demonstrate that biotechnology firms that have submitted patent applications substantially increase the level of funding they receive for their first round of financing. In line with a reduction of information asymmetries once the initial investment has materialized, patent applications and granted patents have no effect on the growth of venture capital funds raised during the second round of financing. We conclude the study with a discussion of avenues for new research, implications for policy makers that consider the usefulness of the current patent system and with insights that can be employed by managers of firms in knowledge intensive areas such as biotechnology.
Subfields: Accounting, Economics and Econometrics, Management of Technology and Innovation
View Paper: https://www.semanticscholar.org/paper/c83177a820e42119d38d380a7ea5ec190c565aed
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Citations in the corpus
- Quality Signals? The Role of Patents, Alliances, and Team Experience in Venture Capital Financing (2015, unknown): “Indeed, patents and research alliances have been argued to serve, in particular, as signals of the quality of the venture’s technology (Audretsch et al., 2012; Baum and Silverman, 2004; Cao and Hsu, 2011; Conti et al., 2013; Häussler et al., 2012; Hoenen et al., 2014; Hsu and Ziedonis, 2013; Long, 2”
- Governmental venture capital in Europe: Screening and certification (2016, background): “In addition to important measures of innovative performance, patents are fundamental to high-tech entrepreneurial ventures based on their signaling value to external investors (Audretsch et al. 2012; Hoenen et al. 2014).”
- What signals matter for social startups? It depends: The influence of gender role congruity on social impact accelerator selection decisions (2019, background): “14 Shepherd, 2003), intellectual capital (e.g., Ahlers et al., 2015; Baum and Silverman, 2004; Block et al., 2014; Hoenig and Henkel, 2015; Haeussler et al., 2014; Hoenen et al., 2014; Nadeau, 2010; Zhou et al., 2016), social capital (e.”