Venture capital investment does not boost patents by technology firms, finds new study at University of Cambridge Judge Business School

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‘Patenting has much sharper effects on VC investments than the other way around’ Venture capital firms are successful by picking innovative firms, not by boosting their patenting output

Venture capital firms are successful by picking innovative firms, not by boosting their patenting output

The number of patents obtained by technology firms is an often-used benchmark of supposed innovation, and some previous studies have found a positive link between venture capital (VC) investment and patent output.

But a new study at University of Cambridge Judge Business School comes to a very different conclusion: the effect of VC on the patenting output of their portfolio companies is insignificant or negative. While VC firms react to patents in order to identify promising tech companies, VC investment doesn’t boost invested firms’ subsequent technological output. This suggests that a key role of VC investment is to focus tech firms’ resources on exploiting their existing intellectual property (IP) through commercialisation rather than fresh technological exploration.

“VC funds select portfolio companies based on the signalling function of patents,” concludes the study published in the journal Research Policy. “Patenting has much sharper effects on VC investments than the other way around.”

The study reaches its findings through a modelling technique that simultaneously examines three factors: the likelihood of firms attracting VC investment, the likelihood that they patent, and the number of patents applied for and granted. A total of 940 US and UK firms that sought financing formed the final study sample.

The study – entitled “Venture capital investments and the technological performance of portfolio firms” – is co-authored by Andrea Mina, University Lecturer in Economics of Innovation and Senior Research Fellow at the Centre for Business Research at Cambridge Judge Business School, and by Henry Lahr, Research Associate at the Centre for Business Research at Cambridge Judge and Lecturer in Finance at the Open University Business School.

“While VC firms are very good at selecting good companies on the basis of their patents, VCs don’t seem to improve the patenting performance of the companies they invest in,” say the authors of the study. “This is consistent with the view of VCs as impatient investors who help firms exploit their IP: VCs don’t want to increase patenting, because they don’t want to manage research projects, but instead they want to focus on one or two really promising pieces of IP.”

The study says: “Our findings show that venture capitalists follow patent signals to invest in companies with commercially viable know-how and suggest that they are more likely to rationalise, rather than increase, the patenting output of portfolio firms.”

The study makes clear, however, that a firm’s possible lower patent output following VC investment does not imply that the company would be better off without such investment. “On the contrary, an insignificant or negative effect of VC on firm patenting suggests that venture capitalists rationalise technological searches and focus the firm’s finite resources, including managerial attention, on the exploitation of exiting IP rather than further technological exploration.”

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