Three Essays in Entrepreneurial Finance and Innovation

Abstract

My doctoral dissertation consists of three chapters focused on topics in entrepreneurial finance and corporate innovation. In the first chapter, I analyze secondary market patent transactions from public assignors (seller firms) to assignees (buyer firms). I show that firms with higher innovation productivity (more able to innovate) but with lower production efficiency (less able to commercialize) are more likely to sell patents distant from their operations. Using a linked assignor-assignee dataset, I find that patents technologically closer to buyer than to seller firms are more likely to be sold in a patent transaction, implying gains from trading patents. I document that, in the three years following patent transactions, seller firms experience a positive and statistically significant improvement in their ROA and operating profitability. I find that the improvement in ROA and operating profitability is concentrated in seller firms which increase their R&D focus after patent transactions, suggesting that an increase in innovation focus is one of the channels driving these results. Consistent with this channel, I find that inventors who are either newly hired by or remaining in assignor firms over the three years subsequent to patent transactions have technological expertise more similar to those of assignor firms. In the second chapter, co-authored with Xi Chen, we study how venture capitalists (VCs) create value in the product market for the entrepreneurial firms backed by them. By constructing a novel dataset based on Nielsen Retail Scanner and VentureXpert, we document that, compared to non-VC-backed firms, VC-backed startups have more than doubled their sales and seized more nationwide market share in the five years following the first VC investment. A further decomposition indicates that VC-backed firms achieve the growth in sales and market share by lowering their product prices. In addition, subsequent to the first VC investment, VC-backed firms enlarge their product portfolios by introducing new products and establishing new product lines, and they expand their products to more stores and geographic locations. Using the limited partner return as an instrument for the supply of VC financing, we show that the above effects are causal. We document heterogeneous value creation effects of VC financing for firms with different market share and for firms with different geographic proximity to the lead VC investors. This suggests that, apart from providing capital, VCs also add value to startups by directing their marketing strategy and monitoring their operations. In the third chapter, co-authored with Thomas Chemmanur, Jiajie Xu, and Xiang Zheng, we analyze the effect of the composition of venture capital (VC) syndicates on value creation to the entrepreneurial firms they invest in. We hypothesize that VCs may learn about each other’s skills at value creation when they co-invest together in entrepreneurial firms, allowing for more efficient value creation when they co-invest in subsequent syndicates. Further, if VCs view syndication as a repeated game, this may generate incentives to co-operate to a greater extent with each other when investing together in a syndicate, reducing the probability of conflicts among VCs. We empirically analyze the implications of these hypotheses and find the following. First, prior collaboration between a lead VC and any of the VCs in a syndicate leads to greater short-term value creation, as evidenced by greater sales growth, employment growth, probability of patented innovation, and the quality of innovations generated during the three years subsequent to VC syndicate investment. Second, prior collaboration between the lead VC and at least one of the syndicate members leads to greater long-term value creation, as evidenced by the higher probability of a successful exit (IPO or acquisition). Third, if the prior collaboration is very successful (leading to an IPO exit resulting from the previous collaboration), then there is even greater value creation by the VC syndicate compared to the case where the prior collaboration was less successful. Finally, consistent with prior collaboration allowing VCs to learn about each other’s value creation skills and reducing potential conflicts among the VCs forming a syndicate, syndicates with prior collaboration between the lead VC and at least one syndicate member are characterized by more uniform syndicate compositions across financing rounds.