Patents, innovation, and performance of venture capital-backed IPOs

• Main Authors: CAO, Jerry X., JIANG, Fuwei, RITTER, Jay R
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Initial public offerings; Venture capital; Patents; Innovation; Long-run performance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5230; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6229/viewcontent/SSRN_id2364668.pdf
• Institution: Singapore Management University

We study the predictive power of patents on the long-run performance of venture capital (VC)-backed initial public offerings (IPOs). We show that VC-backed IPOs that have at least one patent at the time of the IPO substantially outperform other VC-backed IPOs, with 3-year buy-and-hold market-adjusted returns of -7.1% vs. -23.3%. On average, VC-backed IPOs without patents perform similarly to non-VC-backed IPOs. We also report that VC-backed IPOs from 1981-1998 outperformed other IPOs, but the pattern has reversed for IPOs from 1999-2006. Although a smaller proportion of non-VC-backed IPOs possess patents, those with patents also outperform those without patents.