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Publications
  • November 2013
  • Article
  • Journal of Financial Economics

Investment Cycles and Startup Innovation

By: Ramana Nanda and Matthew Rhodes-Kropf
  • Format:Print
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Abstract

We find that VC-backed firms receiving their initial investment in hot markets are more likely to go bankrupt, but conditional on going public are valued higher on the day of their IPO, have more patents, and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is true even for the most experienced VCs. Furthermore, our results suggest that the flood of capital in hot markets also plays a causal role in shifting investments to more novel startups—by lowering the cost of experimentation for early stage investors and allowing them to make riskier, and more novel, investments.

Keywords

Innovation; Market Cycles; Financing Risk; Risk and Uncertainty; Venture Capital; Investment; Innovation and Invention

Citation

Nanda, Ramana, and Matthew Rhodes-Kropf. "Investment Cycles and Startup Innovation." Journal of Financial Economics 110, no. 2 (November 2013): 403–418.
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About The Author

Ramana Nanda

Entrepreneurial Management
→More Publications

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More from the Authors
  • Priors, Experiments, Learning and Persuasion in (Bayesian) Entrepreneurial Finance By: Ramana Nanda
  • Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship By: Michael Ewens, Ramana Nanda and Christopher Stanton
  • Sampling Bias in Entrepreneurial Experiments By: Ruiqing Cao, Rembrand Koning and Ramana Nanda
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