Publications
Publications
- November 2013
- Journal of Financial Economics
Investment Cycles and Startup Innovation
By: Ramana Nanda and Matthew Rhodes-Kropf
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 true even 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, and more novel, investments.
Keywords
Innovation; Market Cycles; Financing Risk; Risk and Uncertainty; Venture Capital; Investment; Innovation and Invention
Citation
Nanda, Ramana, and Matthew Rhodes-Kropf. "Investment Cycles and Startup Innovation." Journal of Financial Economics 110, no. 2 (November 2013): 403–418.