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Small Business Economics

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01.04.2014

The impact of venture capital on the persistence of innovation activities of start-ups

verfasst von: Spyros Arvanitis, Tobias Stucki

Erschienen in: Small Business Economics | Ausgabe 4/2014

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Abstract

In this study we investigate the impact of early stage venture capital on innovation activities of start-ups. This is done based on a cohort of start-ups that is representative of all firms founded in Switzerland in 1996/97, as recorded by a census of the Swiss Federal Statistical Office for this period. We analyze not only the impact of early stage venture capital on innovation performance 3 years after firm foundation, but also 6 and 9 years after firm start, respectively, for those firms that survived and reported continuously innovation activities (persistence of innovation). The results support neither the hypothesis of a positive impact on initial innovation activities nor the hypothesis of a positive time-persistent effect on innovation performance of start-ups.

Vorheriger Artikel The impact of human capital on the early success of necessity versus opportunity-based entrepreneurs

Nächster Artikel Entrepreneurs from low-skilled immigrant groups in knowledge-intensive industries: company characteristics, survival and innovative performance

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See Da Rin et al. (2011) for a comprehensive survey (including also the scarce literature on the effects on innovation); Revest and Sapio (2012) with a focus on European studies; and Rosenbusch et al. (2013) for meta-analysis of 75 empirical studies on the economic effects of venture capital. Wright et al. (2009) reviewed the empirical literature on the economic impact not specifically of venture capital but in general of private equity.

Even more scarce is the literature about the role of venture capital in Switzerland. To our knowledge, only the study of Hopp (2007) deals with venture capital in Switzerland. The aim of this paper is the investigation of the behavior of venture capital in Switzerland with respect to financing mechanisms employed and the extent to which collaboration between venture capitalists is used to cope with informational barriers.

The firms were recorded by the Swiss Federal Statistical Office independent of whether they were enrolled in the Swiss Commercial Register or not.

To test the robustness with respect to this transformation, we also tested a more restrictive definition of venture-financed firms (see Sect. 5.2 and Table 6B).

Note that this share is based on the final estimation sample that excludes firms that received venture funding only after 2000. Obviously the share of firms that received early stage venture capital would be lower, when all firms are included. Furthermore, the share of venture financed firms significantly decreases when we use a more restrictive definition (firms with a value of the original variable above 3). However, such a modification affects our results only marginally (see Table 6B).

An alternative solution to estimate causal effects would have been to apply an instrumental variable (IV) approach. In contrast to the matching approach, IV estimation can provide consistent results even in the presence of hidden bias. However, this typically comes at the costs of a reduced precision of the estimates and introduces new uncertainty from its reliance on additional untestable assumptions (see DiPrete and Gangl 2004).

As most firms in our sample are small, the education variable for the whole firm captures to a large extent also the impact of the education level of the firm founders. As measures for the education level of the firm founders and our measure for the qualification level of all employees are strongly correlated, it was not possible to control for both effects separately.

Despite the inclusion of this broad set of variables, there are of course still certain aspects that we cannot control for but may have an effect on both innovation and the propensity of venture capital funding (e.g., founder personality, risk preferences). However, most of these unobserved aspects are expected to stimulate innovation and would lead to an upward bias of our results. As we find an insignificant effect of venture capital on innovation, this argument would strengthen the plausibility of our results.

Results were similar in alternative estimates where we allowed replacement.

Actually, a few of the model variables refer to the starting period 1996/97–2000 and not to the foundation of the firm (see Table 1). Accordingly, some of the variables do not directly describe the firms’ ‘initial’ innovation capabilities. This is, however, only a marginal limitation, as the low variance of these variables between the different cross-sections indicates that they primarily measure time invariant firm characteristics.

In further estimates not presented here, we reduced the variance of the estimates by dropping potential explanatory variables if they did not have a significant impact. This modification did not affect our results.

While Engel and Keilbach (2007) use the education level of the firm founders as proxy for the education level, we use the education level within the whole firm. However, due to the small average firm size these two variables are strongly correlated in our case. Accordingly, it is not surprising that we also cannot identify a significant effect for the education level of the firm founders.

As the more restrictive definition of venture funding significantly decreased the number of treated firms, it was not possible to re-estimate the models dealing with the persistence of innovation as well.

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Titel: The impact of venture capital on the persistence of innovation activities of start-ups
verfasst von: Spyros Arvanitis
Tobias Stucki
Publikationsdatum: 01.04.2014
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 4/2014
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-013-9499-3

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