"Credit Constraints, Entrepreneurship, and Innovation: Evidence from Venture Capital Exits"

Abstract

This paper examines how the supply of financing impacts entrepreneurial innovation. I present two key findings: First, private-sector funding drives researchers to transition from academia to the private sector, particularly through the creation of new ventures, while also increasing their rate of innovation. Second, greater funding changes the type of innovations being pursued: it leads to shorter-horizon, less-cited, and more narrowly-focused projects. The analysis focuses on the patent output of a panel of potential entrepreneurs: life-science researchers linked to top US universities. Taking advantage of venture-backed IPOs in the same region but in different industries, I identify exogenous variation in life-science venture capital investment, allowing for estimates of causality. Under both OLS and IV specifications, I find that greater funding availability leads to a 10-15% increase in the rate at which researchers transition from academia to the private sector, and that these transitions lead to a 70% increase in patenting. At the same time, greater funding also leads to a 19% reduction in patent citations, reflecting lower scientific value. Further, I find decreases in the scope of innovation and the time horizon of its subsequent impact. The findings of this paper highlight the critical tradeoff between immediate impact and long-term value, and the role that external financing plays in determining both the quantity and the nature of entrepreneurial innovation.