To Be Financed or Not … -The Role of Patents for Venture Capital Financing

This paper investigates how patent applications and grants held by new ventures improve their abilityto attract venture capital (VC) financing. We argue that investors are faced with considerable uncertaintyand therefore rely on patents as signals when trying to assess the prospects of potential portfoliocompanies. For a sample of VC-seeking German and British biotechnology companies we have identifiedall patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find thatin the presence of patent applications, VC financing occurs earlier. Our results also show that VCs payattention to patent quality, financing those ventures faster which later turn out to have high-quality patents.Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do notspur VC financing, presumably because they are anticipated. Our empirical results and interviews withVCs suggest that the process of patenting generates signals which help to overcome the liabilities ofnewness faced by new ventures....