Measuring spillovers of venture capital : conference paper

In this paper we measure knowledge spillovers arising from venture-capital financed companies on the patenting activities of other companies and compare them to spillovers from established firms. We develop a novel measure to to identify the appropriate spillover pool based on backward citations which reflect channels for learning between firms. Using panel data of U.S. firms we show that venture capital investment in start-ups generates significant spillovers on the patent quantity and quality of other firms. Counterfactual estimates suggest that these spillovers are larger than those generated by corporate R&D. We address potential concerns about causality with an instrumental variable strategy using changes in federal and state tax incentives as instrument for R&D and past fund raising as instrument for venture capital investment.