Abstract
This paper empirically examines the informational role of start-ups’ patenting activities in venture capital (VC) financing, based on comprehensive patent data for VC-backed firms in the U.S. from 1976 through 2005. We find that start-ups’ patenting activities before receiving VC investment increase with information asymmetry and predict entrepreneurial performance. Moreover, start-ups with patenting activities receive greater funding from more VC funds, experience longer incubation periods, and slowdown in patenting activities right after receiving VC investment. Our empirical evidence suggests that patenting activities effectively mitigate information problems between entrepreneurs and venture capitalists.
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