There is a substantial body of literature on the extent to which firms that receive venture capital financing generate more innovation than non-venture-backed companies. Most studies find that, on average, venture capital leads to increased innovation. However, this average impact is likely to be the result of the aggregation of very diverse cases. Venture capital investors are different from one another, and their deals may be based on different transaction structures. Both the characteristics of the investor and the structure of the deal are likely to moderate the relationship between venture capital financing and innovation. This paper is an attempt to shed light on this issue. First, we distinguish between two fundamentally different types of investors: governmental and private venture capitalists. These two types of investors have different objectives, skills, and investment horizons. Second, we differentiate between two transaction structures: syndicated and stand-alone deals. We further distinguish between syndicated deals led by private investors and those led by governmental investors, and between syndicated deals that are homogeneous (i.e., composed of investors of the same type) and those that are heterogeneous (i.e., composed of both private and governmental investors). By combining existing theories with empirical evidence on venture capital, we expect (i) firms backed by private investors to outperform firms backed by governmental investors, (ii) firms backed by a syndicate to outperform firms backed by a stand-alone investor and (iii) firms backed by a heterogeneous syndicate to outperform firms backed by a homogeneous syndicate. We hypothesize that private-led heterogeneous syndicates should be the form of venture capital that is most effective at promoting innovation in portfolio companies. We perform an empirical analysis on a sample of 865 young biotech and pharmaceutical companies from seven European countries and measure innovation output based on each firm’s patent stock. Our results, which are robust to alternative measures of patent stock, alternative econometric specifications and other alterations, confirm our hypotheses as follows: companies financed by syndicates and by private venture capital investors have a greater increase in innovation output than comparable non-venture-backed companies, and the form most supportive of innovation is a heterogeneous syndicate led by a private investor.
Bertoni, Fabio and Tereza Tykvova (2012), Which Form of Venture Capital Is Most Supportive of Innovation?, ZEW Discussion Paper No. 12-018, Mannheim.