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  • Summer 2020
  • Article
  • Journal of Economic Perspectives

Venture Capital's Role in Financing Innovation: What We Know and How Much We Still Need to Learn

By: Josh Lerner and Ramana Nanda
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Abstract

Venture capital is associated with some of the most high-growth and influential firms in the world. Academics and practitioners have effectively articulated the strengths of the venture model. At the same time, venture capital financing also has real limitations in its ability to advance substantial technological change. Three issues are particularly concerning to us: 1) the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; 2) the relatively small number of venture capital investors who hold, and shape the direction of, a substantial fraction of capital that is deployed into financing radical technological change; and 3) the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms. While our ability to assess the social welfare impact of venture capital remains nascent, we hope that this article will stimulate discussion of and research into these questions.

Keywords

Innovation; Financing; Venture Capital; Financing And Loans; Technological Innovation

Citation

Lerner, Josh, and Ramana Nanda. "Venture Capital's Role in Financing Innovation: What We Know and How Much We Still Need to Learn." Journal of Economic Perspectives 34, no. 3 (Summer 2020): 237–261.
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About The Authors

Josh Lerner

Entrepreneurial Management
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Ramana Nanda

Entrepreneurial Management
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More from the Authors
  • Apax Partners and Duck Creek Technologies By: Josh Lerner, Terrence Shu and Alys Ferragamo
  • Government Incentives for Entrepreneurship By: Josh Lerner
  • Financial Innovation in the Twenty-First Century: Evidence from U.S. Patents By: Josh Lerner, Amit Seru, Nick Short and Yuan Sun
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