Entrepreneurial Exits and Innovation

Abstract

We examine how IPOs and acquisitions affect entrepreneurial innovation as measured by patent counts and forward patent citations. We construct a firm-year panel dataset of all venture capital-backed biotechnology firms founded between 1980 and 2000, tracked yearly through 2006. We address the possibility of unobserved self-selection into exit mode by using coarsened exact matching (CEM), and in two additional ways: (1) we compare firms that filed for an IPO (or announced a merger) with those who did not complete the transaction for reasons unrelated to innovation, and (2) we use an instrumental variables approach based on the relative level of IPO versus acquisitions market "heat". Our across-and within-mode results are consistent with altered project selection and incentives associated with differing levels of information disclosure to outsiders shaping innovation outcomes. These firm-level results are not explained by an alternative mechanism of inventor-level turnover following exit events.

What is the role of public feeder markets in developing technology-based small firms? An exploration of the motivations for listing on AIM since the GFC

“…The listed businesses in plateau referred to seeking 'organic growth' and a period of relative stability after recent growth phases from new product marketing. They largely conform to Aggerwal and Hsu's (2013) finding that post IPO businesses are less innovative (in terms of patent counts) than their private equity counterparts. However, this may be seen as part of the innovation cycle.…”

“…These skills may be gained through training, experience and relationships, providing enhanced insights and judgements that can lead to competitive advantage in a range of management areas such as sales and marketing, product and service development, operations management and, crucially, financial management. Aggerwal and Hsu (2013) point to four key strands of management exit decision literature: first, venture capitalist (VC) negotiation strengths (Hellman 2006;Cumming 2008); second, public market strengths (Bayar and Chemmanur 2012); third, company market position in relation to acquisition (Poulsen and Stegemoller 2008); and fourth, founder characteristics where their retained control is more associated with IPOs than trade sales. From a RBV perspective, the interplay between the relative VC strength, the entrepreneur and other management resources, including the use of external advisors and non executive directors (NEDs), would appear to be a vital and under researched factor.…”

“…A crucial factor in the growth models of these businesses is the combination of decision factors which determine management preferences for IPOs, trade sales or other options at the time when TBSFs move from early stage to later, growth stage finance when private equity exit might be anticipated (Aggerwal and Hsu 2013). In this paper the focus is on whether management factors (the management RBV) have primacy over macro economic or structural public market factors in the decisions that are made.…”

“…However, the general trend towards increasing levels of reporting will have unwelcome increasing time and cost burdens. One CEO exhibited Aggerwal and Hsu's (2013) 'dark side' explanation for IPOs limiting innovation by reducing tolerance to failure (Manso 2011). They highlighted concerns that IPO market information requirements (AIM admission requires technical, strategy, market strengths and event timetabling documentation) and subsequent investor updates could assist competitors, particularly if R&D is slower than planned and allows competitors to catch up on their innovation.…”

The Schumpeterian entrepreneur: a review of the empirical evidence on the antecedents, behaviour and consequences of innovative entrepreneurship

“…Thus, the innovative environment seems to mitigate scale disadvantages for small entrants. Aggarwal and Hsu (2014) approach the same question from the opposite angle. They investigate the effect of entrepreneurial exit on innovation.…”