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Do patents affect VC financing? Empirical evidence from the nanotechnology sector

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Abstract

This paper analyzes the importance given by Venture Capital firms (VCs) to the patent portfolios of start-up companies in their financing decisions. In particular, the contributions presented are twofold. First, we determine whether the amount of VC financing is associated with three elements related to technological portfolios: number of patent, patent scope and number of “core technology” patents (i.e., those patents related to core technological capabilities of the company). Second, we examine whether the relevance of patents for the financing decisions varies across different types of VC firms, depending on their industry specialization and affiliation. We provide empirical evidence from a sample of 332 VC-backed companies in the nanotechnology sector for the period 1985–2006. Our results confirm the importance of core technology patents in the VC investment decisions, especially for specialized VCs, when compared with generalist VCs. However, no differences are found between corporate and independent VCs.

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Notes

  1. In the Y01N subclass the term ‘nanotechnology’ covers all things with a controlled geometrical size of at least one functional component below 100 nanometres (nm) in one or more dimensions susceptible to make physical, chemical or biological effects available which cannot be achieved above that size without a loss of performance (Scheu et al. 2006).

  2. Venture Economics classifies all VC deals in 6 main categories, according to the stage of development of the investee company: seed, early-stage, expansion, later-stage, buyout/acquisition, and other. Since our interest resides in new ventures, we focused exclusively on deals belonging to the first 4 categories. In order to identify companies operating in nanotechnology, we adopted the classification of Venture Economics, which assigns each company to specific technological areas, including nanotechnology.

  3. Venture Economics identifies the date and number of investors for each financing round, and in most cases the amount invested by each investor, but it does not systematically track the price paid per share. Given that data on the so called pre-money valuation were largely unavailable, we were unable to assess the impact of patent portfolio size, focus and scope on firm value, as in Lerner (1994).

  4. For syndicated deals, we refer to the degree of specialization of the lead investors, based on previous evidence showing that they tend to exert a primary role and influence in such cases (Wright and Lockett 2003). More precisely, syndicates consist of consortia of VC firms co-investing in a company and sharing a joint pay-off. Previous research has shown that the lead investor holds on average larger equity stakes compared with non-lead investors and adopts a more hands-on approach than his colleagues, being much more involved in the monitoring and managing of the investee company (Gorman and Sahlman 1989; Barry 1994; Das and Teng 1998; Wright and Lockett 2003).

  5. Differently from the distinction between Specialized versus Generalist VCs which is driven by the presence (absence) of a specialized (generalist) leading investor, in this second case we do not consider the presence of a corporate leading investor. Indeed, the few observations in which the leading investor is a CVC firm (17 observations) do not permit the application of the same proxy used in the previous case.

  6. We were not able to compute the index of specialization in nanotechnology for two companies in our sample, due to missing data.

  7. However, as the correlation matrix for the subsample of companies financed by generalist VCs shows a high correlation (0.81) between Patents and Patent Scope, we ran further estimates dropping the latter variable. In this case, Patents result positive but not statistically significant, whereas Nano Patents remains positive and not statistically significant, confirming that nano-specialized VCs consider more nanotech patents in their investment decisions than generalist VCs.

  8. Since data on top-management teams were available only for a limited number of companies included in our sample, we decided to present these results in a distinct “Robustness check” section.

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Acknowledgments

Financial support by the EIBURS programme of the European Investment Bank (EVPAT Project, “The Economic Valuation of Patents”) is gratefully acknowledged.

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  1. University of Bologna, Bologna, Italy

    Federico Munari & Laura Toschi

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  1. Federico Munari
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Munari, F., Toschi, L. Do patents affect VC financing? Empirical evidence from the nanotechnology sector. Int Entrep Manag J 11, 623–644 (2015). https://doi.org/10.1007/s11365-013-0295-y

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