PhD seminar with Katarina Warg

Title: The role of exit markets and scarcity of capital in shaping innovation output of start-ups

Abstract: I propose that active acquisition markets incentivize start-up firms to invest in innovations complementary to incumbent firms’ assets, even though the firm is more valuable as a stand-alone firm and this strategy is costly. I suggest that complementary innovations increase the value of a firm’s acquisition option. This shifts the bargaining power in favor of the firm vis-à-vis potential investors in future financing rounds and the relative value entrepreneurs and existing investors retain in future financing rounds is higher. The strength of this channel increases when capital is scarce or frictions in capital markets are high. I develop a two-stage financing model with search frictions to illustrate this channel and provide empirical evidence using patent and trademark text-based measures of innovation output of VC-financed firms in the US.