Working Papers
VC exits and startup innovations*
This paper examines how venture capital (VC) funds' preference for timely exits shapes startups' innovation strategies. I show that startups align innovation efforts to appeal to potential acquirers, regardless of startup quality, type, or eventual exit outcome. Using patent text and a novel application of trademark data, I analyze both technological and product market innovation. Exploiting the staggered adoption of the Prudent Investor Rule, I find that VCs reinforce acquisition-oriented innovation, while increased local VC supply reduces such catering. These findings reveal how a key VC feature and reliance on VC funding shift innovation from independent exploration toward incumbent needs.
*A previous version of this paper had the title "The acquisition option and startup innovations."
VC competition and catering incentives
This paper outlines a tractable empirical framework to illustrate the role of capital market supply in shaping startups’ innovation trajectories. Startups cater to potential acquirers to increase the expected value in the event of an acquisition. The incentive to engage in catering activities increases as capital becomes more scarce. The model illustrates how changes in capital scarcity can cause startup innovations to become more similar to incumbent firms’ assets. The only friction in the model operates through the relative capital supply—the cost of delay represents search costs, and the costs associated with finding an investor or investments map directly to the relative capital supply.
Who becomes a business angel?
With Laurent Bach, Ramin Baghai, and Per Strömberg
The availability of external finance for early-stage enterprises is vital for entrepreneurship and innovation. Using data from Swedish administrative registries, we identify business angels, that is, individuals repeatedly financing startups, and characterize who among the general population eventually becomes a business angel. Angels are overwhelmingly drawn from the top 1% of the wealth distribution and are just as likely as other rich people to originate from wealthy families. However, angels have distinguishing characteristics compared to the rich in general. Angels are generally highly educated and have often chosen business-relevant degrees. Similarly, many angels have leadership experience from startups, public companies, or transactional (IPO, M&A, LBO) experience. Angels also have much higher general ability than even other very wealthy peers and relevant comparison groups. Their asset allocation is very biased towards the riskiest assets, suggesting unusually low levels of risk aversion and strong non-pecuniary investment motivations. Our analysis provides important insights for the design of policies encouraging the financing of early-stage ventures.