The Returns to Early-Stage Investment in Innovation

Abstract

This paper uses highly detailed administrative records from the Norwegian Tax Authority to provide direct measures of the returns from investing in newly established, innovative companies. We trace out the entire funding and pricing histories of each firm and study performance measures at the transaction and investment levels. Many investments result in total loss, but returns exhibit extreme right-skewness. Cross-sectional analysis shows that different investor types earn widely differing returns even in the same investment. This arises not just because they invest on different terms, but because they make different decisions about holding or selling shares. The opaqueness and uncertainty implied by this heterogeneity is indicative of the market frictions associated with early-stage investment in innovation.