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Venture Capital, Patenting, and Usefulness of Innovations

Simona Fabrizi (), Steffen Lippert (), Pehr-Johan Norbäck () and Lars Persson

No 8392, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze incentives to develop entrepreneurial ideas for venture capitalists (VCs) and incumbent firms. If VCs are sufficiently better at judging an idea's value and if it is sufficiently more costly to patent low than high value ideas, VCs acquire valuable ideas, develop them beyond the level incumbents would have chosen, and use patents to signal their companies' high value to acquirers prior to exiting. This increases the VC-backed companies' patenting intensity and long-run performance, but also infl ates their acquisition prices, and lowers their acquirers' overall profits. Patent law usefulness clauses would reduce such excessive, signaling-driven investment and patenting intensity.

Keywords: innovation; patent law; patenting intensity; preemptive vs late acquisition strategies; signaling; usefulness requirement; venture capital (search for similar items in EconPapers)
JEL-codes: C70 D21 D82 G24 L26 M13 O31 O34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-ent and nep-ino
Date: 2011-05
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Working Paper: Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process (2008) Downloads
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