Monitoring Secretive Startups

This article examines the mechanisms used by venture capitalists (VCs) to monitor their investments in startups that use trade secrets to protect their intellectual property (IP). First, we confirm that, after startups are afforded stronger trade secrets protection by the adoption of the Uniform Trade Secrets Act (UTSA), they reduce their reliance on patents. Next, we investigate how VCs respond, finding that they decrease both the duration of financing rounds and the overall amount invested per round, especially for startups located the furthest distance away. Finally, we consider how these collective changes affect the exiting process, finding that the likelihood of a successful exit through either an initial public offering (IPO) or merger or acquisition (M&A) is unchanged, but that, within successful M&A exits, the likelihood that the acquirer is private increases. Overall, our findings suggest that VCs work harder to monitor startups that use trade secrets and that this increased effort is necessary to maintain similar likelihoods of successful exiting