Thursday, 31 December 2015

Does venture capital investment boost patent output?

"Venture capital firms are successful by picking innovative firms, not by boosting their patenting output". This reassuring statement is the opening line of a report released shortly before Christmas by the Cambridge Network. Its key points read as follows:
"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 [Indeed, there is no logical reason why it should do so]. 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 [It may also suggest that VC firms prefer to come in later, once key IP has been identified and recognised as being relevant, viable and protectable, rather than buying in at an earlier stage at which protection and development prospects are less clear].

“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” [This is good news for the patent analytics sector, which can assist VC companies in deciding where, whether and when to invest by focusing on the pattern of patent activity within a potential target sector].

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 [this impressively large sample adds weight to the study's conclusions]. ....”
While patent-seeking activity is generally agreed to be more intensive in the United States than in the United Kingdom and other European Union countries, it may be that the effect of VC investment on both sides of the Atlantic is to calm the rate of patent application by enabling portfolio companies, now secure in the knowledge that they have attracted investment through their innovation, to narrow their own focus towards creating a return on that investment.

The study, “Venture capital investments and the technological performance of portfolio firms”, is co-authored by Dr Andrea Mina (University Lecturer in Economics of Innovation and Senior Research Fellow, Centre for Business Research, Cambridge Judge Business School) and Henry Lahr (Research Associate at the same Centre and Lecturer in Finance at the Open University Business School). For further information, and access to the study, click here.

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