The diminishing signaling value of patents between early rounds of venture capital financing

Abstract

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Quality signals? The role of patents, alliances, and team experience in venture capital financing

“…5 Also most earlier studies on the topic (Audretsch et al, 2012;Cao and Hsu, 2011;Conti et al, 2013;Häussler et al, 2012;Hoenen et al, 2014;Hsu and Ziedonis, 2013;Long, 2002) are framed within Spence's (1973) signaling theory-without, however, discussing the question of Spencian versus decision-theoretic signals and why the former provides the more appropriate framing. 6 In statistical terms, the quality of the technology represents the hidden or latent variable, while a start-up's resource constitutes a proxy from which the value of the hidden variable can be inferred, albeit with uncertainty (e.g., Bartholomew and Knott, 1999;Upton and Cook, 2002).…”

“…Similarly, we are not aware of any study that disentangles the signaling and productive effects of alliances and team experience. As notable exceptions, Hsu and Ziedonis (2013) and Hoenen et al (2014) show that the effect of patents on venture capital financing is stronger in situations where signals are more urgently needed-in early funding rounds, when the venture team has no IPO experience, and when, at the IPO, the venture is not backed by a prominent VC. The authors interpret these findings as evidence of a signaling effect of patents.…”

“…In line with Spence's (1973) definition, all of them can potentially serve as signals as they are differentially costly to obtain for ventures of different quality. 1 Indeed, patents and research alliances have been argued to serve, in particular, as signals of the quality of the venture's technology (Audretsch et al, 2012;Baum and Silverman, 2004;Cao and Hsu, 2011;Conti et al, 2013;Häussler et al, 2012;Hoenen et al, 2014;Hsu and Ziedonis, 2013;Long, 2002;Mann and Sager, 2007;Stuart, 2000). Also team experience might provide a signal in this regard as a high-quality technology is more likely to attract a good team.…”

“…First, we add to a recent stream of research on the role of observable resources in venture capital financing (Audretsch et al, 2012;Baum and Silverman, 2004;Cao and Hsu, 2011;Conti et al, 2013;Greenberg, 2013;Hoenen et al, 2014;Hsu and Ziedonis, 2013;Häussler et al, 2012;Mann and Sager, 2007). To the best of our knowledge, this study is the first to clearly separate the signaling effect of three important start-up resources from their function as productive assets, and to assess their relative importance as signals.…”

Offensive Patent Portfolio Races

“…Such a firm has " […] an incentive to produce the indicator rather than what it is supposed to indicate" (Macdonald 2001(Macdonald , 2004. The usage of patents to improve a firm's reputation has been empirically shown by Blind et al (2006) and Ramani and Kumar (2008) and, with a focus on venture capital financing, by Hsu and Ziedonis (2013) and Hoenen et al (2014).…”