Working Papers

Presented at the EFA (2022), CICF (2022), SFS Cavalcade Asia-Pacific (2022), WEFI (2022), FMA (2022), FIRN (2022), FMA Asia Pacific (2022), FMCG (2022)

We examine how venture capitalists (VCs) adapt their financing strategies to support startups competing against deep-pocketed incumbents. Employing textual analysis to identify a startup's potential competitors, we show that when the competitors are cash-rich, VCs make their financing less conditional by providing more funding each round and evaluating the startup less on short-term performance. This approach requires VCs to rely more on continuous monitoring and liquidation protection, and is restricted to large funds and those with specialized experience. Our results suggest that, as large firms have gained greater financial power,  VCs serve as a counter-balancing force to sustain business dynamism.

Venture capitalists have been criticized for underinvesting in basic science. Yet, the public good nature of basic science necessitates public funding. We study whether public funding of academic research aimed at filling gaps in basic science can foster VC investment. Exploiting the BRAIN Initiative (BI), a focused government program with the goal of mapping the human brain, we find an increase in VC investments in neurotech startups accompanied by higher valuations and more successful VC exits. Three channels drive these results: 1) a higher supply of skilled labor as observed through more academic human capital as founders or inventors; 2) more innovation, as measured by the quantity and quality of patents, including breakthrough patents; 3) enhanced integration of neuroscience with complementary technologies, especially AI and machine learning. The last channel aligns with the BI's data-driven mission, facilitating a stronger synergy between data science and neuroscience. To show more direct evidence of causality, we collect information on BI-funded publications and their co-authors. We find VCs make larger investments in startups that employ these co-authors, highlighting the premium VCs place on the expertise of these scientists. Our results indicate that by supplying basic science and scientists, mission-oriented public funding crowds in private investments in emerging technologies.

Work in progress