ANOUK WESTERVELD
12Supervisor: Dr. H. Vrolijk
Co-assessor: Dr. N. Brunia
June 2014
University of Groningen – MSc International Financial Management
University of Uppsala – MSc Economics and Business
H
OW IMPORTANT ARE PATENTS IN
ATTRACTING
V
ENTURE
C
APITAL
?
ABSTRACT
This thesis examines whether and how patents enhance the ability of start-up entrepreneurs to attract external financing in the form of venture capital (VC). Based on signaling theory and existing literature, I argue that investors rely on tangible quality signals of ventures, such as patents, in order to reduce uncertainty and to (partially) overcome the information asymmetry gap.
For a sample of 110 Dutch VC-financed ventures in the Life Sciences industry, all patent applications and grants were identified at the European Patent Office (EPO). A self-constructed dataset is used to analyze the role of patents in attracting (foreign) investors and in entrepreneurial performance of Life Sciences ventures in the Netherlands.
Empirical analysis reveals that the role of patents is rather complex. In this study, patents play a more significant role in attracting foreign investors, than in attracting Dutch investors. The results also show that patents are more meaningful for a syndicate of investors than for a single investor, and generally gain more importance later in the investment process. This is in contrast with existing literature, which emphasizes the positive influence of patents on obtaining an initial VC-investment. The empirical results, validated with qualitative information from interviews, hence suggest that the process of patenting is more valuable for ventures seeking investments from foreign VCs, a syndicate of VCs, or for ventures that have already received their first round of VC-financing.
Key words: Venture Capital, patents, Life Sciences, information asymmetry, signaling theory
T
ABLE OF
C
ONTENTS
1 INTRODUCTION ... 3 2 LITERATURE REVIEW ... 4 2.1VENTURE CAPITAL ... 5 2.1.1 VC investment cycle ... 6 2.1.2 Stages of VC investing ... 7 2.1.3 Syndication ... 8 2.2FINANCING INNOVATION ... 92.2.1 Key problems for entrepreneurs in attracting capital ... 9
2.2.2 Information asymmetry ... 10
2.2.3 The role of Intellectual Property in ventures ... 12
2.2.4 Patents as a quality signal ... 13
2.2.5 Previous empirical studies ... 14
2.3LIFE SCIENCES INDUSTRY ... 15
2.3.1 Introduction Life Sciences ... 15
2.3.2 Venture capital in the Life Sciences ... 16
2.3.3 Life Sciences in the Netherlands ... 17
2.4HYPOTHESES ... 17 3. RESEARCH METHODOLOGY ...19 3.1DATA ... 19 3.2SAMPLE ... 20 3.3APPROACH ... 21 4 RESULTS ...21 4.1PATENTS ... 22
4.2VCFINANCING AND INVESTORS ... 23
4.2.1 Results independent T-Tests ... 24
4.3ENTREPRENEURIAL PERFORMANCE ... 26
4.3.1 Results independent T-Tests ... 27
5 DISCUSSION ...28 5.1PATENTING ACTIVITY ... 29 5.2VC INVESTMENTS ... 31 5.3ENTREPRENEURIAL PERFORMANCE ... 34 5.4PRACTICAL RELEVANCY ... 34 5.6LIMITATIONS ... 36 6 CONCLUSION ...37
6.3RECOMMENDATIONS FOR FUTURE RESEARCH ... 38
REFERENCES ...40
APPENDIXA–CONSTRUCTION OF DATASET ... 44
APPENDIXB–DECISION TREE STEPS FOR GROUP SORTING ... 45
APPENDIXC–INTERVIEW PROTOCOL ... 46
APPENDIXD–FULL SAMPLE INVESTMENT DISTRIBUTION PER YEAR ... 47
APPENDIXE–RESULTS OF THE INDEPENDENT T-TESTS BETWEEN THE GROUPS ... 48
1
I
NTRODUCTION
All entrepreneurs who pursue innovative activities face a similar crucial endeavor, the mobilization of the required resources in order for their idea or product to survive and ultimately to become successful. Rapidly growing worldwide venture capital flows are the main resource providers for these entrepreneurs. In order to obtain these resources, entrepreneurs have to convince venture capitalists of the underlying, and often unobservable quality of their firm and the market potential of its product(s). Subsequently, these external investors will evaluate the observable characteristics that they deem to correlate with the unobservable quality of the firm in order to determine the venture’s potential growth (Stuart et al., 1999). These observable attributes, for instance patents, may thus serve as a quality signal during the assessment of prospective investment opportunities. As a result, patents may not only have a protective function, but also serve as quality signals, which may reduce information asymmetry and associated agency costs.
A large strand of empirical studies has revealed the positive impact of patents for start-ups in innovative industries. Generally, most studies find that patents contribute to firm growth, as they are able to shield a firm from competitors by offering protection, and simultaneously award a firm with monopolistic market rights, amongst other benefits. Several studies have examined the facilitating role of patents in the commercialization of technology (Haeussler, 2011), the positive impact of patents on innovation (Kortum & Lerner, 2000), and how patents reduce the time to Initial Public Offering (Stuart et al., 1999). However, only a handful of studies have addressed the signaling value that patents may have towards external parties. These studies have mainly looked into the effect of patents on firm valuation (Lerner, 1994), the probability of attracting a prominent investor (Hsu & Ziedonis, 2008), the amount of financing received (Baum & Silverman, 2004; Hsu & Ziedonis, 2008; Mann & Sager, 2007) and following performance measures such as company profitability or IPO (Baum & Silverman, 2004). Nevertheless, literature is still relatively scarce on the role of patents in attracting (foreign) venture capital.
Therefore, more research and empirical evidence is required to gain a thorough understanding of the signaling role of patents for entrepreneurs in attracting venture capital. This thesis aims to bridge this gap by answering the following research question “Do
I examine whether venture capitalists rely on tangible quality signals from new ventures when they try to assess and evaluate the market potential of prospective investment opportunities. Thereby I aim to shed light on the role of IP, in particular patents, as quality signals and describe and analyze its part in attracting (foreign) capital. For a sample of 110 Dutch Life Sciences firms, filed and granted patents are identified at the European Patent Office (EPO). A self-constructed dataset comprising comprehensive financial and patent information allowed for empirical analysis on this matter.
This study extends the growing body of entrepreneurial financing literature in several ways. Firstly, I constructed a comprehensive dataset containing patent information on VC-backed start-ups in the Life Sciences industry in the Netherlands for the period 1990 – 2013, providing an overview of the relation between entrepreneurs and venture capitalists over two decades. Secondly, to my knowledge, I am one of the first to empirically examine the signaling role of patents for ventures in the Life Sciences industry in the Netherlands. Thirdly, the results shed some light on the strategic relevance of patents for both entrepreneurs and venture capitalists, paving the way for further research.
The remainder of this thesis is organized as follows. Firstly, a comprehensive literature review will be provided on venture capitalism, the financing of innovation and venture capital in the Life Sciences industry in the Netherlands. In addition, the theory associated with the signaling role of patents is thoroughly discussed. This is followed by a description of the data collection and research methodology. Next, sector 4 will provide a preliminary analysis based on descriptive statistics. This is followed by a comprehensive discussion on the results, where the quantitative results are validated with qualitative information from interviews. Finally, section 6 concludes and provides suggestions for further research.
2
L
ITERATURE REVIEW
literature review on the role of IP to overcome information asymmetry and finally, the signaling value of patents for external (foreign) investors.
2.1 Venture Capital
The venture capital cycle typically starts with a venture established as a result of an individual or group of people that have an idea with potential commercial value, but the inability to explore the feasibility of this idea and the lack of expertise and capital to exploit products and markets. Generally, new ventures face well-known challenges when they aim to secure financial, managerial and organizational resources that are required for survival and growth (Stinchcombe, 1965). Due to their limited track record and lack of stable cash flows, entrepreneurs of innovative companies often have difficulties in accumulating external financing and skills in order to successfully transform from the stage of product concept to commercialization of a product. This is also referred to as the ‘valley of death’, the period of negative cash flows required in order to be able to generate future positive cash flows, during which ventures may go bankrupt due to a lack of growth capital.
The capital needed for this transition typically cannot be provided by the entrepreneurs themselves, as their resources have already been used or are insufficient to foster growth. In addition, start-ups that are in the beginning of the growth phase have problems obtaining debt capital, as their assets have little to no liquidation value, therefore not being of interest to lending institutions such as commercial banks who require collateral (Hall, 2005). Hence, these firms have to resort to equity capital. However, they do not have access to the traditional capital markets, giving rise to the equity gap. The equity gap refers to the problems related to attracting the necessary financial resources for new ventures (Wetzel, 1983).
Venture capital has, to some extent, filled this gap by providing financial and organizational resources to start-up level business entrepreneurs. Shilson (1984, pg. 208) defines venture capital as “an activity by which investors support entrepreneurial talent with finance and
business skills to exploit market opportunities and thus obtain long term capital gains”.
Similarly, Tykvová, Borell, and Kroencke (2012, p. 15) define it as “the investment of
long-term, unquoted, risk equity finance by professional investors in young firms”. Hence, venture
In order to compensate for this risk, Venture Capitalists (VCs) provide financing in exchange for partial ownership of the company, and aim to realize (excess) profits by the exit strategy in the form of public listing or a sale of the company.
Once a VC invests in a company, they are actively involved and contribute their business experience and knowledge of the industry gained from previous investments projects. Therefore, venture capital has come to play a significant role in the development of young, innovative and high-growth companies, and is often referred to as the “money of invention” (Kortum & Lerner, 2000). The importance of the venture capital industry is emphasized by Bygrave and Timmons (1992, pg. 1) who state that “Venture capital has played a catalytic
role in the entrepreneurial process: fundamental value creation that triggers and sustains economic growth and renewal. In terms of job creation, innovative products and services, competitive vibrancy, and the dissemination of the entrepreneurial spirit, its contributions have been staggering. The new companies and industries spawned by venture capitalists have changed the way in which we live and work”.
2.1.1 VC investment cycle
In short, a VC investment cycle consists of the following phases. Firstly, a VC must raise funds, then identify feasible opportunities and structure and execute deals with entrepreneurs. Subsequently, it intensively monitors investments, whilst contributing organizational and operational resources. Ultimately, a VC aims to earn a return on their invested capital by successfully exiting their investment.
Therefore, the potential for exit from an investment opportunity plays a significant role in the investment decision of a VC. As the entrepreneurial firm is seldom able to pay out dividends to their owners in the early stages of their development, the primary return that VCs receive from their investment is the profit realized from the exit strategy (Landström, 2007).
Selection criteria for VCs hinge on observable and tangible signals of the quality of the underlying venture. As most ventures invest heavily in R&D, this results in a vast amount of intellectual property. VCs tend to have distinctive competences to value IP assets and spend a considerable amount of time to evaluate these IP assets.
2.1.2 Stages of VC investing
Venture capital investments can be distinguished by the phase of development in which the receiving company (investee) is located. Roughly 3 distinctive types of VC investments arise, namely; seed, start-up, and expansion investments. Seed-financing refers to capital that is used by ventures for initial product research and development (R&D) and which enables the venture to evaluate the feasibility and potential commercialization of their ideas during the early stages (Jeng & Wells, 2000). Secondly, the start-up investment are for ventures that still do not generate positive cash flows, but are in the process of production and close to bringing their product to the market. Investment in the seed stage and the start-up phase are also referred to as early-stage investments (Jeng & Wells, 2000). Lastly, the expansion
investments are targeted at firms who already brought its product to the market, but need
additional finance to facilitate the growth of its manufacturing and/or distribution capacity in addition to continuous R&D funding.
2.1.3 Syndication
A venture capital syndicate involves a number of VCs that take an equity stake in an investment project during an investment round. As stressed by literature, from the point of view of the VC, a syndicate is driven by the objective of sharing information in order to reduce uncertainty (Lerner, 1994; Manigart et al., 2006). Literature emphasizes that VCs seek to diversify financial risk by sharing information about the venture and hereby are able to capitalize upon the expertise of better informed co-investors in monitoring the investment (Lerner, 1994; Gompers & Lerner, 2001; Manigart et al., 2006). From an entrepreneur’s perspective, it can seek to attract multiple VCs if a single VC is not capable of providing the required resources (Manigart et al., 2006).
When such a syndicate involves at least one foreign VC, it is called a cross-border syndicate. A cross-border syndicate can either have only one foreign VC in combination with one or more local VCs (also named a mixed syndicate), or solely multiple foreign VCs. According to a research from the Vico Project (2011), ventures backed by a mixed VC syndicate show enhanced performance in the short- and long-term, compared to ventures backed by solely local or foreign VCs. Hence, from an entrepreneur’s point of view, in addition to seeking local venture capital financing, it may pay off to go the extra mile to attract foreign venture capital financing.
In general, there has been a tremendous increase in the share of cross-border investments. This is evidenced by the increase of cross-border private equity and venture capital flows from 15% in the 1990s to over 40% in 2007 (Aizenmann & Kendall, 2008). Similar conclusions were drawn by Schertler and Tykvova (2011), who found that roughly 40% of total transactions include cross-border transactions in the Netherlands after a thorough investigation of worldwide venture capital flows.
2.2 Financing innovation
In this section, I will thoroughly discuss what problems start-ups entrepreneurs face when they aim to attract capital and the control mechanisms to overcome these problems, as indicated by current literature.
2.2.1 Key problems for entrepreneurs in attracting capital
As previously stated, innovative firms typically have problems attracting conventional capital due to a lack of collateral, and information and incentive problems. As ventures are unable to prove their competencies with a solid track record, particularly information and incentive problems play a significant role in the equity gap. These information problems tend to impede the ability to attract financing for new firms, and are specifically associated with the significant level of tacit knowledge embedded in the firm, the degree of uncertainty that surrounds innovation, and information asymmetry between the entrepreneurs and potential external investors (Murray & Lott, 1995; Berger & Udell, 1998; Hall, 2005).
The resulting output from investments in R&D and technologies are often in the form of intangible assets, which represents the knowledge base of the venture. In general, this knowledge is complex and entrenched within the human capital of the venture, making it tacit and difficult to codify (Nonaka, 1994). Due to these characteristics, proper assessment of the value of the venture, and the feasibility and potential of the idea and technologies are extremely difficult and carry high risk for potential investors. As a result, entrepreneurs and investors are bound to make decisions under different conditions pertaining to the level of information available, creating potential for substantial agency problems.
2.2.2 Information asymmetry
Information asymmetry is based upon the principal-agent theory. This theory specifies that both the agent and the principal aim independently for utility maximization and due to misaligned interests, this can lead to conflicts and agency costs (Jensen & Meckling, 1976; Ross, 1973). In the context of venture capitalism, the VC can be seen as the principal, who contributes resources whilst the venture can be seen as the agent, who contributes the innovative activities and manages the resources. When both parties are not able to gather all the information to base their investment decision upon, as the value of the product or service cannot be properly determined, this may lead to information asymmetry.
Therefore, information asymmetry is present between a VC and an entrepreneur in a transaction situation. In particular, it is relevant for knowledge transfers, where the investor cannot determine in advance what the knowledge is worth (Millar, 2004). It is argued by Admati and Pfeiderer (1994) that the level of information asymmetry is key in defining the prerequisites when closing a financing agreement between the entrepreneur and the investors, particularly when the entrepreneur’s activity is innovative.
Information asymmetry can be distinguished by two different types, namely adverse
selection and moral hazard.
Firstly, adverse selection refers to pre-investment information asymmetry. This may present challenges to VCs, as amongst the entrepreneurs who seek external financing, there are some entrepreneurs who convey the message that their potential innovative technology is better than it truly is, and they are most likely to aim to obtain financing from VCs. As a result, VCs will face more difficulties distinguishing good investments from bad investments. As will be more elaborated upon, this is the risk that can be alleviated by the proper evaluation of IP and the use of patents as a quality signal.
Moral hazard refers to post-investment information asymmetry and the possible
The risk of these hazards have led VCs to spend a considerable amount of time and effort in the assessment of potential investment opportunities, and have incentivized entrepreneurs to undertake action to achieve recognition and legitimacy (Zott & Huy, 2007).
As VCs carry both risks, their primary concern is to reduce the information asymmetry gap and maximize the upside profit potential. In the case of moral hazard, existing literature emphasizes the role of monitoring and bonding for VCs in order to reduce the potential opportunistic behavior of entrepreneurs. Monitoring refers to the extensive observation of a firm’s performance and an entrepreneur’s actions by the investors. This can be done by for example seat on the Supervisory Board of the firm. Bonding refers to the alignment of interests of the entrepreneur and the investors by for example contractual obligations. This is confirmed by Chan et al. (1990), who argue that the risk of moral hazard can be limited by defining and structuring an agreement in such a way that grants the investors the prospect to replace management when results do not meet expectations and are unacceptable. The construction of such comprehensive contracts may provide VCs with the ability to influence the entrepreneur’s behavior, thereby limiting the downside risk and maximizing the potential success rate of the investment.
In order to alleviate the risk of adverse selection, existing literature emphasizes two main control mechanisms, namely screening and signaling.
Screening refers to actions a VC undertakes in an attempt to reduce the risk of adverse selection, for example by conducting an extensive ex ante due diligence screening of the venture proposals. VCs generally have distinctive capabilities to assess entrepreneurial projects and firms resulting from extensive experience and knowledge of the screening process of companies.
2.2.3 The role of Intellectual Property in ventures
The last decades, intangible assets have gradually become more important as drivers of value for ventures that operate in competitive industries and environments (Lev, 2001; Levitas & MacFadyen, 2009). Hence, these intangible assets, and specifically the protection of these assets, have become very important selection criteria for potential investors in order to determine the market potential of a firm in need of resources.
Intellectual Property Rights, and in particular patents, traditionally have two non-mutually exclusive functions, namely a protection function and a signaling function.
Firstly, the protective function will provide value to the venture, as they facilitate the protection of the developed technology. Therefore, they can be seen as an attractive asset, as it prevents competing organizations from using the firm’s underlying technology or product. An additional advantage for ventures is that this may give them the ability to facilitate the licensing of technology and thereby securing another stream of revenues (Haeussler, 2011).
Secondly, stemming largely from the protection function, the tangible output of IP can serve as a signal to third parties. This signal represents the quality of the developed technology and as it is thought to signify the underlying quality of the firm. This signal may positively affect the perception of investors, thereby reducing the risk of adverse selection, and accordingly attract (foreign) capital. Therefore, IP assets and specifically patents play an important role in the financing of ventures, as illustrated in figure 1 which is inspired by the figure provided by Mateos-Garcia (2014).
Figure 1 - A conceptual model of the role of an IP asset
Entrepreneurial firm Equity investor (VC) Venture capital Equity stake IP asset
Signaling function about: Firm’s ability to exclude
competitors
Prospect of future profits Scientific expertise
Specifically in the context of cross-border investments, both the investor and the entrepreneur will have to contribute considerably more time and effort in screening and signaling the quality of the potential investment. Increased geographic and physical distance, in addition to potential language and culture barriers, could severely increase information asymmetry and therefore associated agency costs. Hence, it can be reasoned that the quality of signals can therefore play a key role in mitigating information asymmetry between the entrepreneur and the (foreign) VC.
2.2.4 Patents as a quality signal
A signal can be defined as an attribute that correlates with firm performance, but is more easily observed and evaluated than the underlying factors that drive firm performance. Hence, a patent serves as a prime example of such a signal, due to its tangible nature resulting from investments in R&D in the form of intellectual capital, even though being surrounded by a severe amount of uncertainty that comes with innovative activities.
Signaling previous accomplishments of a start-up can be advantageous for both investors and entrepreneurs, as its value lies in reducing information asymmetry, resulting in minimized information costs for the investors (Long, 2002). Particularly in a context where intangible assets are crucial for a firm’s competitive advantage, patents can play a key role in signaling the quality of the typically unobservable commercial potential and value of the venture to third parties. This is confirmed by Levitas and MacFadyen (2009), who argue that patents can serve as a tangible signal about the firm’s ability to transform a venture’s R&D investments into valuable knowledge, thereby reducing the information asymmetry between the entrepreneurs and investors.
According to Heil and Robertson (1991), the crucial element of how well a signal is received is its credibility, which is enhanced by the independent valuation of the IP by a patent office. Specifically in a context where many start-ups battle for the same pool of external financing, an important investment determinant may be the quality of IP assets, as the higher the quality, the more likely the firm is able to develop a sustainable competitive advantage than its competing counterparts in the market.
they have to adhere to strict guidelines and include technical information. The investment an entrepreneur makes by filing for a patent, signals that the venture has sufficiently matured in order to protect the technology or knowledge it has developed for commercialization.
2.2.5 Previous empirical studies
The relevance of Intellectual Property Rights, and particularly patents, for securing VC-financing and its impact on innovation is backed by some empirical evidence, but generally it is relatively scarce. Next, a short overview of conducted studies will be provided.
Baum and Silverman (2004) investigated the impact of patents on the amount of VC financing received. They found a positive relationship between the number of patent grants and applications and the total amount of funding for biotechnology firms in Canada. Additionally, they report that their results reveal that the characteristics that trigger a VC’s investment decision are positively correlated with the features that trigger exit, namely a high-risk component.
Similarly, Hsu and Ziedonis (2007) conducting several regression analyses on semiconductor start-ups in the United States during the period 1980 – 2005. They found that patents positively influence the amount of received VC financing. In their study, this especially held true for founders that have less entrepreneurial experience, in the early funding rounds when they are able to secure capital from prominent VCs. With data from the same database, Hsu and Ziedonis (2013) additionally argue that patents have a positive effect on start-up firms’ valuations in the semi-conductors industry.
Next to this, Hsu and Ziedonis (2011) came to the conclusion that the more patenting activity a company displays, the more likely they are able to attract a prominent investor for their initial round of VC-financing. Not only are firms with more patenting activity able to attract prominent investors, Haussler et al. (2009) add to this that this also shortens the time to the first VC-financing round in biotechnology start-ups in Germany and the United Kingdom.
number of patents and some indicators of firm performance, such as number of investment rounds and total amount of received funding.
Likewise, the study of Cao and Hsu (2010) investigated the effect of patent grants for VC investees prior to the first round of VC financing on the probability of completing and IPO and the probability of failure for the period 1972 – 2005 in the United States. They found that VC investees with patents have a lower probability of failure than VC investees without patents.
Concluding, while the benefits of patenting activity have been researched in other countries and industries to a limited extent, a similar research has not been conducted yet in the Netherlands.
2.3 Life Sciences industry
In this section, a brief introduction to the Life Sciences industry and its characteristics will be provided. Life Sciences is an industry that has historically benefitted enormously from venture capital. Conducting research on venture capital in the Life Sciences industry therefore is interesting as on the one hand, this industry is largely dependent on investments from VCs due to the substantial required amount of capital needed in order to develop innovative products. On the other hand, firms in this industry are essential for (medical) innovation, creating more welfare for countries in general as it is able to converse scientific knowledge into affordable benefits for people and, in particular, patients (Lerner et al., 2003).
Additionally, the protection of intellectual property is of significant important in the Life Sciences industry, hence firms tend to compete with their rivals in patent races. The first one to cross the finish line is the winner, and the prize is the patent granted. A granted patent offers significant benefits, for instance firms get awarded with a 20-year monopoly right amongst other benefits.
2.3.1 Introduction Life Sciences
According to the Organization for Economic Cooperation and Development (OECD), Life Sciences can be defined as “the application of science and technology to living organisms, as
production of knowledge, goods and services” (OECD, 2005, pg. 9). Therefore, this industry comprises companies in the field of biotechnology, pharmaceuticals and healthcare.
2.3.2 Venture capital in the Life Sciences
Innovative firms in the Life Sciences industry can be characterized by high R&D costs, and generally are unable to generate a stream of revenues for an extensive period of time and are thus prone to the “valley of death”. In general, the ventures in this industry operate in a risky environment, with a total value chain duration of approximately 10 to 15 years. This value chain entails the initial establishment of the firm driven by the development of a technology or product, followed by the patenting of the developed technology and governmental approval, to ultimately the commercialization of the technology or product (Hand, 2007). As argued by Lerner et al (2003), it may take up hundreds of millions to develop such a product and take it to the marketplace, and hence it takes a long time before the firm generates positive cash flows and is able to return initial investments.
Even though in some countries the government is prepared to invest in Life Sciences, these publicly available financial instruments are perceived to be unstable, deficient and complex (HPG, 2010). Therefore, firms in the Life Sciences industry are in particular receptive of venture capital financing.
Additionally, most of a venture’s value lies in its market potential and estimates for future growth, as the industry is intangible-intensive and there is typically a low value of collateral in case of liquidation. As a result, conventional types of financing, provided by banks, are rather unfeasible (Hand, 2007). Hence, most firms in the Life Sciences industry have to resort to venture capital to obtain the necessary financing.
Accordingly, high importance is placed on the monitoring function in order to exert some control on firms who receive venture capital financing. As argued by Gompers (1995), VCs typically focus their investments on intangible-intensive firms where monitoring is seen as most valuable.
2.3.3 Life Sciences in the Netherlands
According to existing literature, the Netherlands builds on a strong foundation of science with a vast clinical research and innovation infrastructure, particularly in Life Sciences. This can be evidenced by the number and amount of investments in this sector in the Netherlands. In 2013, for €120 million was invested in 90 Life Sciences ventures according to the NVP (2014). As a result, the Netherlands delivers approximately 2.5% of world science output (Lageveen, 2013).
Moreover, the Netherlands is said to have relatively one of the highest patent productivity in the world in addition to many scientific publications. It currently ranks 4th worldwide with its number of patents per capita, and its Life Sciences research output measures up to those of its larger neighboring countries.
2.4 Hypotheses
Based on the theory and literature discussed above, the following hypotheses were developed support the main research question stated in the introduction, and to gain a more thorough understanding in the role of patents in relation to the attainment of venture capital and entrepreneurial performance.
Following signaling theory and the assumption that firms in the Life Sciences industry are largely dependent on their developed IP, the first hypothesis will focus on to what extent Life Sciences ventures in the Netherlands possess a patent portfolio prior to their first VC-investment.
1) Because patents have a signaling function, most – if not all – start-ups receiving VC in the first round will have one or more granted patents.
opportunity by investors, and thus be able to attract more investors. Therefore, the second hypothesis focuses on the signaling function of patents in relation to the number of investors.
2) As the signaling function of patents is especially important when more than one investor are involved, firms with a patent portfolio attract more investors than firms without a patent portfolio.
Thirdly, assuming that the information asymmetry gap between entrepreneurs and investors is increased by physical and cultural distance, expectation is that ventures with a patent portfolio have a higher probability of attracting a foreign investor. Hence, the following hypothesis focuses on the signaling function of patents in relation to the share of foreign investors.
3) As the signaling function of patents is especially important in transactions with foreign
partners, firms with a patent portfolio have a larger share of foreign investors than firms without a patent portfolio.
Fourthly, the amount of funding a venture is able to attain, is thought to positively correlate with a firm’s performance. Therefore, following Baum and Silverman (2004), I also expect a positive relationship between a firm’s patenting activity and the total amount of funding obtained from VCs, which is the focus of the fourth hypothesis.
4) Firms with a patent portfolio obtain more funding than firms without a patent portfolio.
Finally, Mann and Sager (2007) argue that patenting activity of a firm gives an indication of the likelihood of successfully exiting the VC-cycle, as it captures how well a firm is able to protect and commercialize developed technologies. Therefore, this hypothesis focuses on the relation between patents and entrepreneurial performance, whereby entrepreneurial performance is measured by how ventures exit the VC-cycle.
These hypotheses merely aim to shed light on whether several relationships exist between patenting activity of a firm and other variables. They seek to explore an aspect of the relationship between patenting activity of a firm and its ability to attract investors and subsequently the firm’s performance.
3.
R
ESEARCH
M
ETHODOLOGY
In this section, the research methodology will be explained, such as the data gathering, a description of the final sample and the approach used.
3.1 Data
For the purpose of this thesis, data on VC investments in the Life Sciences industry in the Netherlands was gathered from the ThomsonOne VentureXpert database, which was complemented by information from the Orbis database (by Bureau van Dijk). ThomsonOne is a comprehensive database on, amongst others, VC financing worldwide and contains information on the investments, the investors, the number of financing rounds, and the number of VCs that take an equity stake. Data on the origin and number of VCs in a syndicate was retrieved, in addition to the amount of financing and number of rounds from this data source. Next, every company in the sample was examined manually in Orbis, to determine whether the participating VCs had executed an exit strategy such as an IPO or acquisition, or in the worst case scenario, if the company had been dissolved or gone bankrupt.
Then, data was collected on patents per company from the European Patent Office (EPO). A distinction must be made between the application date and the grant date. The application date refers to the date when the firm filed for a patent. This date can be seen as the most relevant date as argued by Hall et al. (2001), as entrepreneurs tend to file for a patent as soon as they complete the innovation, and hence use the patent application as a quality signal when they approach potential investors. The grant date refers to the date when the patent has been granted. Generally, it takes about 18 months for the EPO to grant a patent. Given this time lag, I decided to look at both the application date and the grant date of the patents, as investors are not only able to examine the granted patents but also the filed patents.
By matching these two data sources, I was able to construct a comprehensive dataset containing information per company on received financing, the participating VCs, patent applications, and patent count. In this study, patent count refers to all granted patents for a company in the period 1990 – 2013. For more detailed information on the construction of the dataset, I refer to appendix A.
3.2 Sample
The final sample consists of 110 Dutch companies who received financing between 1990 and 2013. All ventures in the sample are located in the Netherlands in the Life Sciences industry and have received at least 1 round of venture capital financing, from one or more Dutch VC(s), one or more foreign VC(s), or a mixed syndicate of VCs. The companies in the final sample jointly have 546 patent counts.
Of the companies provided in the sample, 46% was invested in by a single VC and the remaining 54% was invested in by a syndicate of VCs. The syndicate comprised either only Dutch VCs, only Foreign VCs, or a mix of Dutch and Foreign VCs.
Table 1 provides an overview of investments made in the companies in the final sample. As shown in the table, 24% of the companies received financing from a mixed syndicate, 15% from only foreign VCs and 61% from only Dutch VCs. As illustrated in the table, there has been a gradual increase in VC investments in the Netherlands over time. This increase can mainly be allocated by an increase in investments by Dutch VCs from 2001, and by an increase in mixed VC syndicates from 2006, comprising at least 1 Dutch and at least 1 foreign VC.
Table 1 - VC investments in Life Sciences ventures in the Netherlands during 1990 - 2013 Only Dutch VC(s) Only Foreign VC(s) Dutch & Foreign VCs Total
Total VC investments Absolute 67 17 26 110
As % 61% 15% 24% 100%
Single investor As % 67% 35% 0%
Syndicate As % 33% 65% 100%
2001 – 2005 31 6 7 39%
2006 – 2013 33 3 15 46%
Total 67 17 26 100%
Source: own dataset (see appendix A)
3.3 Approach
Due to the relatively small sample and a lack of financial performance indicators, this thesis will use a combination of both quantitative and qualitative analyses. Miles and Huberman (1994) argue that validating quantitative data with qualitative data provides several benefits; it elaborates the analysis and as a result may provide richer detail. Additionally, it enables confirmation and validation of the results by using multiple approaches, also known as triangulation.
Mostly descriptive statistics will be used, added by some independent t-tests. The results will be validated with interviews, which will be conducted with some ventures and some experts in the field of VC investments.
4
R
ESULTS
As a preliminary analysis, this section will divide the final sample of companies into 3 groups, using the steps as illustrated in appendix B.
The first group contains VC investees who have not filed nor been granted any patents during the period 1990 – 2013, but nonetheless received VC financing. As for the firms in this group patents did not serve as a quality signal to investors, apparently the lack of patents did not impede their ability to obtain VC-financing.
Finally, the third group includes VC-backed companies with patent applications and grants
after the initial VC investment round. Therefore, the patent count of the firms in this group
did not serve as a quality signal, at least not prior to the first VC investment.
The figure below illustrates the groups and displays the number of companies per group.
Figure 2 - Group composition
N As %
Group 1 No patent portfolio during examination period 50 45%
Group 2a First investment after at least 1 patent grant 22 20%
Group 2b First investment after at least 1 patent application 15 14%
Group 3 At least 1 patent granted after first investment 23 21%
Total 110 100%
4.1 Patents
Of the 110 companies in the final sample, about 45% did not have any patented innovations or products during the examination period, and are thus located in group 1. The residual 55% has been granted patents or applied for at least one patent during the period 1990 – 2013. Hence, these companies are located either in group 2 or group 3, dependent on the timing of their patent application and grant.
15% of all 546 patents were granted prior to the first VC investment, and 6% were filed for but not yet granted, summing up to a total of 21%. Meaning that the overwhelming majority (85%) of the patents were granted after the first investment.
The 21% of total patents comprises grants and applications before the first investment, and can be allocated to 34% of the companies, located respectively in group 2a and 2b. Only 20% of the companies have been granted a patent prior to the first VC-financing and 14% has filed for a patent prior to the first VC-financing. A possible explanation is that it is quite costly (approx. €25.0003) and time consuming for a firm to file for a patent at the EPO, and they require a substantial initial investment in order to do so.
Finally, 21% of the companies reside in group 3, meaning that these firms have been granted a patent after the initial VC investment.
4.2 VC Financing and investors
In order to gain a better understanding of the types of investors the companies attract and the financing they receive, the different groups were examined more thoroughly. Table 2 reports on the investor(s) and investment information per group.
Table 2 - Structure of investors per group and VC financing
GROUP 1 GROUP 2 (prior) GROUP 3 (after)
No patents Granted Application Granted
N 50 22 15 23 Investor(s) information Single investor 56% 32% 53% 39% Syndicate 44% 68% 47% 61% Total 100% 100% 100% 100% Only Dutch VCs 74% 45% 60% 48% Only Foreign VCs 18% 14% 13% 13% Mixed syndicate4 8% 41% 27% 39% Total 100% 100% 100% 100% Investment information
Median firm age (in years)5 2,94 4,76 2,08 2,37 Average total funding (US$ mln) 21,45 23,43 26,77 38,65 Average # of rounds 1,56 2,04 1,04 3,52 Average # of investors 1,72 3,63 3,26 4,78
Source: own dataset
All groups both have single investors and syndicates of VCs. The majority of the investors in group 1 and 2b are single investors, in contrast to group 2a and 3, where the majority of ventures is invested in by a syndicate of investors.
When examining the origin of the investors, in group 1 (no patents) around 74% of the companies are funded solely by Dutch VCs. Contrary to group 2 and 3, where approximately
4
Consisting of at least one foreign VC and at least one Dutch VC.
5 Firm age represents the period of time in years from the founding date of the company until the first
half of the companies are funded by a foreign investors, regardless whether that is through a mixed syndicate of VCs or solely foreign VCs.
These results suggest that there may be a relationship between the patenting activity of a firm, and the type of investor(s) they attract. However, conclusions on the causality of this relationship cannot be inferred from this table.
Additionally, when examining the investment information, the table indicates three additional patterns. Firstly, it can be seen that average total funding is higher for the groups with patenting activities, especially a large difference exists between group 1 and 3. Secondly, the average number of investment rounds shows a similar difference between group 1 and 3. Group 3 has, on average, more than double the investment rounds than group 1. Thirdly, the average number of investors shows a comparable increase, where the difference between group 1 and group 3 is most noteworthy.
4.2.1 Results independent T-Tests
In order to determine whether the means of the groups differ significantly from one another, I conducted multiple independent t-tests.
The following approach is used for all the tests, where 1 represents one group and 2 represents the other group;
Hypotheses Independent T-tests
H0 𝜇1 = 𝜇2
H1 𝜇1 ≠ 𝜇2
Firstly, I have tested whether the variables differed significantly between the group of companies with a patent portfolio and the group of companies without a patent portfolio during 1990 – 2013. Based on signaling theory and existing literature, I expect that companies with a patent portfolio should be better able to overcome the information asymmetry gap, hence be able to attract more (foreign) investors and funding, thus a positive relation.
patent portfolio prior to their initial investment can better compensate information asymmetry, thus a positive t-statistic is expected.
Thirdly, it was investigated whether it makes a significant difference if a firm has been granted a patent (group 2a) or when it has only filed for a patent (group 2b) prior to the first investment. A granted patent should send out a stronger signal due to certification of a Patent Office, and thus I expect a positive t-statistic here as well.
The tests were conducted on several variables, including total number of VCs, share of foreign VCs in total number of investors, firm age, number of investments rounds and total amount of funding. The test results are reported in table 3.
Table 3 - Results of independent T-tests Patents vs. no patents
Patents prior vs. patents after first investment
Patent grant vs. patent application6 Granted7 Application8 Total # of investors T-stat 4,356 -0,959 -1,137 0,342 P-value 0,000* 0,344 0,263 0,735 Share of Foreign VCs in total # of investors T-stat 1,782 0,172 0,449 0,593 P-value 0,048* 0,864 0,656 0,558 # of rounds T-stat 2,595 -2,146 -3,341 1,712 P-value 0,011* 0,039* 0,003* 0,097
Firm age T-stat 1,651 0,765 0,846 2,391
P-value 0,104 0,449 0,404 0,022*
Total funding T-stat 0,624 -0,990 -0,665 -0,251
P-value 0,537 0,334 0,514 0,806
Source: own dataset
* p-value < alpha of 0,05; we can reject the null hypothesis
For a significance level of 5% for a two-tailed test, we are able to reject the null hypothesis if the t-statistic falls outside a critical range of t-distribution with a given degrees of freedom. For the patents vs. no patents sample, the positive t-statistics for all variables illustrate that the group of companies with patents have a significantly greater mean than the group of
6 Testing group 2a vs group 2b 7 Testing group 2a vs group 3 8
companies with no patents, which is in accordance with expectations. The results show that we can reject the null hypothesis for the following variables; total number of investors, share of foreign investors in total number of investors, and number of investment rounds. For the patents prior vs. patents after initial investment sample, a negative t-statistic for the variables total number of investors, number of investment rounds, and total funding can be found. This tells us that firms with patents after the initial investment tend to have a higher mean for those variables. Albeit not being statistically significant, this negative outcome is not in line with expectations and discredits the signaling theory. Only the number of investment rounds is statistically significant for this sample.
For the patent grant vs. patent application sample, a positive t-statistics tells us that firms with patent grants have a higher mean for all variables except for total funding. This indicates that firms with patent applications receive a higher amount of total funding, though not statistically significant. Only firm age is statistically significant in this sample. This intuitively makes sense as it generally takes approximately 18 months before a patent gets granted, therefore, these firms are thought to be older when they receive their first VC-investment.
In order to specifically determine the added value of having a patent portfolio on attracting (foreign) investors, some Ordinary Least Squares regressions were conducted. Time lapse, number of total investors and number of foreign investors were used as dependent variables. For independent variables, several dummies were taken for, for instance, a patent application prior to first investment, patent grant prior to first investment, foreign investors and Dutch investors (last two were used for the dependent variable time lapse). However, these regressions yielded no significant results. For the results, I refer to appendix F.
4.3 Entrepreneurial performance
At the end of 2013, approximately 65% of the companies has not executed an exit strategy, and is still backed by VC financing. Roughly 25% of total companies in the final sample had either gone bankrupt or is dissolved. About 10% of the companies experienced a positive exit-strategy as they either had gone public through an IPO, or had been acquired by another company.
Considering the patenting activity in relation to the previously assembled groups presented in figure 2, table 4 reports the exit-strategy for the firms per group.
Table 4 - Exit-strategy per group
GROUP 1 GROUP 2 (Prior) GROUP 3 (After)
No patents Granted Application Granted
N 50 22 15 23
IPO / M&A 6% 18% 0% 17%
Bankruptcy / dissolved 32% 27% 13% 13%
No exit 62% 55% 87% 70%
Total 100% 100% 100% 100%
Source: own dataset
As illustrated in the table, 32% of the firms in group 1 has either gone bankrupt or has been dissolved. Only 13% of the companies in group 3 experienced this scenario.
Similarly, only 6% of the companies in group 1 has gone public or has been acquired, compared to a 17% of the companies in group 3.
4.3.1 Results independent T-Tests
I statistically examined whether there are differences in number of investors, share of foreign investors and patent count between the group of firms that successfully exited the VC cycle (through an IPO or M&A) and the group of firms that either went bankrupt or had been dissolved. Based on the signaling theory and patents reducing agency costs, expectation is that the group of companies who successfully exited the VC-cycle has a significantly larger patent count and more investors than firms that did not successfully exit the VC-cycle. As illustrated below, the same approach is used as before.
H0 𝜇1 = 𝜇2
H1 𝜇1 ≠ 𝜇2
For a significance level of 5% for a two-tailed test, we are able to reject the null hypothesis if the t-statistic falls outside a critical range of t-distribution with a given degrees of freedom. The results of the independent t-test are displayed in table 5.
Table 5 - Results of independent T-tests
IPO / M&A vs
Bankruptcy / dissolved
Total # of investors T-stat 3,264
P-value 0,008*
Share of foreign VCs in total # of investors T-stat 1,889
P-value 0,045*
Patent count T-stat 1,530
P-value 0,048*
Source: own dataset
* p-value < alpha of 0,05; we can reject the null hypothesis
The positive t-statistics for all 3 variables confirm that the group of companies that successfully exited the VC-cycle, have a significantly higher mean of total investors, a larger share of foreign VCs in total number of investors, and perhaps most importantly, they have a larger patent count. This indicates that there is a positive relationship between these variables and the likelihood of entrepreneurial success.
5
D
ISCUSSION
I investigated the effect of patents on the ability of ventures to obtain VC-financing in the Life Sciences industry in the Netherlands. Existing literature emphasized the role of patents as a quality signal to external investors, indicating that the larger the information asymmetry between parties, the more investors rely on strong and reliable signals that represent the underlying quality of the venture.
hypotheses will be addressed and will be complemented with an analysis based on current literature and information gathered from several interviews.
5.1 Patenting activity
Existing literature emphasizes the role of patents in the Life Sciences industry. Surprisingly, the results reveal that 45% of the companies that received VC-financing in the period 1990 – 2013 does not have a patent portfolio at all. More specifically, only 20% of the companies have one or more granted patents prior to the initial investment. This is not in accordance with most literature, which basically states that the Life Sciences industry is dependent on the protection of inventions and thus on patents. This was also highlighted in an interview with an investor who stated that patents in the Life Sciences industry are key assets for entrepreneurs in their pursuit of securing financing.
These results leads us to reject the first hypothesis: Because patents have a signaling
function, most – if not all – start-ups receiving VC in the first round will have one or more granted patents.
The fact that the patenting activity of the companies in the sample is not in accordance with existing literature requires some clarification. Some potential explanations as provided in interviews with start-up entrepreneurs are as follows.
disregarded. Therefore, firms who may have acquired a patent are not the official owners according to the EPO, and these patents are thus not represented in my dataset.
Another potential explanation for, as mentioned in an interview, the lack of patents for a vast amount of companies may stem from the type of operations a company has. When it mainly operates as a service company, the company has more to lose from publicizing its invention by filing for and being granted a patent than when keeping it a trade secret. This is due to the fact that, generally, services do not deliver a tangible output such as a medicine or specific substance that can be traced back to the firm that invented it. Therefore, in the case of a service company, a patent does not prevent others from copying the same service within their own territory.
In other words, when a firm decides to file for a patent (knowing this will make its invention publicly available after being granted the patent), it will only do so if it is able to detect infringements by others on their patented technology. If detection of such infringements is practically impossible, the company is more likely to opt for keeping the invention a trade secret rather than patenting it.
For instance, a company whose mission it is to develop medication for Alzheimer, developed a tool along the way that provided the company with the ability to stabilize the cells they work with. This consequently allows them to better conduct research. This tool appeared to be more widely applicable and therefore also beneficial to other scientists working with similar cells. This firm specifically decided not to patent this tool, as it would be unable to detect infringements by others due to the lack of tangible outputs. However, as the firm noticed the interest of others in the output the tool generates, it currently sells the output the tool produces, generating an additional stream of income for the firm.
5.2 VC investments
As indicated in the results section, I examined both investor(s) and investment information for all groups presented in figure 2.
Pertaining to investors’ information, it seems that the groups including companies who have been granted patents before and after the first investment (group 2a and 3 respectively), include more firms that have been invested in by a syndicate of VCs. This may indicate that granted patents are not as imperative as a quality signal to overcome the information asymmetry problem for a single investor, as a single investor may compensate this in a different manner. But whenever a firm needs a syndicate of investors to obtain the minimum amount of financing necessary, the VCs in the syndicate may require patent grants in order to ensure the quality of the firm. This especially holds true for mixed syndicates (both Dutch and Foreign VCs).
The results of the independent t-tests confirm the expectation that firms with a patent portfolio have a significantly higher mean of total number of investors than firms without a patent portfolio. Therefore, these results lead us to accept the second hypothesis: As the
signaling function of patents is especially important when more than one investor are involved, firms with a patent portfolio attract more investors than firms without a patent portfolio.
Another significant difference arises from the origin of the investors between the selected groups. An overwhelming majority of the companies in group 1 (no patents) are invested in by Dutch VCs (74%). Though there appears to be a correlation here, the causation is inconclusive. Two possible explanations are as follows.
their idea, than the actual output produced. Some entrepreneurs in the Life Sciences industry in the Netherlands have an astounding reputation, and therefore may more easily be able to attain financial resources from Dutch VCs due to their personal track record. This may then cause a domino-effect; if one well-known Dutch VC is on board and publicly announces its investment in the venture, others may follow more easily. Therefore, a patent portfolio may not carry as much value for Dutch VCs as for foreign VCs, as Dutch VCs are able to receive and interpret intangible signals such as the quality and expertise of the management team.
Another explanation is that the ventures in group 1 are unable to demonstrate their solid patent portfolio and thus track record to foreign investors, resulting in a larger information asymmetry gap between entrepreneurs and foreign investors. This eventually forces these ventures to seek financing from VCs that are closer in terms of physical and cultural distance. Specifically in a cross-border transaction situation, where it appears difficult to convince investors of the reliability and quality of the venture, more value is placed by investors on credible ex ante information as, for instance, a patent expresses. This is backed by an investor who states that foreign investors, seeking to invest in a Life Sciences firm in the Netherlands, generally have a lot of expertise and skills in the area they are looking to invest in. Therefore, they select ventures on their ability to protect developed technologies, which intrinsically conveys the message of the venture’s scientific skills and expertise. For that reason, a patent portfolio may especially be of interest to foreign investors.
This is confirmed by the results of the independent t-tests. For a venture seeking VC-financing, the possession of a patent portfolio has a significant positive effect on the share of foreign investors in total number of investors. This leads us to accept the third hypothesis:
As the signaling function of patents is especially important in transactions with foreign partners, firms with a patent portfolio have a larger share of foreign investors than firms without a patent portfolio.
Concerning investment information, the results in table 2 indicate that firms with patenting activities typically receive a larger average amount of funding than firms without patenting activities. This is confirmed by the results of the t-tests, stating a positive, yet insignificant, outcome regarding firms with a patent portfolio vs. firms without a patent portfolio pertaining to total funding. Although being statistically insignificant, this positive relation leads us to accept hypothesis 4: Firms with a patent portfolio obtain more funding than firms
However, it should be noted that firms that have been granted patents after the initial investment, receive an even larger amount of funding than firms with patenting activities
before the initial investment. The results of the t-tests confirm this, reporting a negative, yet
insignificant, outcome for the results of total funding as shown in table 3. This may indicate that patents become more valuable as a quality signal after the first investment, later in the investment cycle.
According to theory, patent grants are perceived to be stronger quality signals than patent applications. The results of the t-test indicate that the outcome between being granted a patent and having filed for a patent is positive, though not statistically significant. In an interview, an investor confirms this and remarks that a granted patent is preferred, however patent applications also are valuable. Given the long time lag in a patent examination process9 (between a patent application and a patent grant) investors tend to extensively assess patent applications as well. If they do not have the capabilities to examine the quality of such an application in-house, they outsource it to a patent expert. Therefore, entrepreneurs already benefit if they file for a patent, and in contrast to what theory states, a patent application is not perceived to be a weaker quality signal than a patent grant.
Concluding, the results of the t-test imply that in an entrepreneur’s pursuit of attracting investors, regardless of their origin, having some sort of protected developed technology or product facilitates the process and positively affects the ability of entrepreneurs to attract (foreign) investors.
It appears that Dutch VCs also positively appraise a venture with a patent portfolio, but relatively less than foreign investors, due to their ability to interpret intangible signals as well. As the regression analysis yielded no significant results, it remains to be further investigated to what extent foreign investors value such a patent portfolio, and therefore influences their investment decision.
More research is needed to determine to what extent, and in what circumstances, a patent portfolio has a positive effect on attracting foreign investors. Potentially a more qualitative research, taking form of a survey or more interviews, will help gain an understanding in what foreign investors are looking for when investing in Life Sciences ventures in the Netherlands.
9
5.3 Entrepreneurial performance
Existing research, such as the Vico Project (2011), highlights the fact that having more foreign investors, and specifically a mixed syndicate consisting of local and foreign investors, yields better results in terms of the exit strategy. This is consistent with the findings from my dataset, where companies with a patent portfolio are more likely to have a foreign investor and to have a successful exit. Or, in other words, are less likely to have a non-successful exit such as a bankruptcy or becoming dissolved.
So on the surface, it appears that companies that reside in group 1 are more vulnerable to a non-successful exit from a VC investment, namely a bankruptcy or becoming dissolved. Roughly 32% of group 1 has experienced such an exit, in contrast to approximately 13% in group 3 (which displays more patenting activities).
After statistically examining the companies with a successful exit vs. companies with an unsuccessful exit, I found that there is a positive and statistically significant relationship between patent count, number of investors and share of foreign investors and the likelihood of a successful exit. This leads us to accept hypothesis 5: As the signaling function of patents
indicates how well a firm performs, firms with a patent portfolio are more successful than firms with no patent portfolio. Further research is needed to specifically determine the
effect of patents on the exit-strategy of ventures.
Finally, as one investor mentioned, it should be considered that ventures within the Life Sciences industry are more likely to be acquired than to successfully exit the VC-cycle through an IPO. This is due to the fact that they often develop medication or technologies, for which they are not capable of producing and distributing them at a larger scale. For that reason, pharmaceutical companies such as, for instance, Pfizer or Johnson & Johnson tend to closely monitor the development of such ventures, and as soon as the venture has matured enough, and in the best case scenario has had a medical break-through, they acquire the venture and take over the production and distribution part of the value chain.
