Brown Bag Seminar Industrial Economics

Venture capital (VC) is often seen as an instrumental tool that allows many start-ups to pursue innovation with the potential to shake-up current markets and/or to replace incumbents. Using a highly granular, project-level dataset from preclinical diabetes R&D, this paper shows that VCs actively steer the direction of R&D and streamline activities of research focused firms (pipeline firms) - but not in such a direction. On the one hand, VC backed projects are more likely to be pursued, but only if they have a breakthrough potential and do not face any existing product market competition. On the other hand, in large enough firms, VCs are more likely to discontinue projects in the markets with existing product competition and projects that are technologically closer to the projects of big diabetes incumbents. In addition, the latter effect is stronger for incumbents with the highest market power. The results therefore suggest that whilst VCs pursue potentially more valuable “big-hit” innovations creating new markets, they also actively streamline R&D to avoid competition in the existing markets – especially with the incumbent firms.