The Impact of Venture Capital on Innovation

Abstract

Abstract This article begins by reviewing the empirical evidence on the impact of venture capital on innovation. It identifies some of the key challenges to empirical research in this area and discusses the methods that have been used to address them. There is evidence of a substantial impact of venture capital on innovation, measured by patent counts, at the industry level (at least for the United States). Although estimates vary, on average a dollar of venture capital appears to be three to four times more potent in stimulating innovation than a dollar of traditional corporate R&D. There is no corresponding evidence of a significant impact of venture capital on innovation at the individual-firm level. The article discusses possible explanations for this difference, including the difficulties of adequately controlling for the endogeneity of venture capital investment at the firm level.

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