Josh Lerner

Assessing the Contribution of Venture Capital to Innovation

We examine the influence of venture capital on patented inventions in the United States across twenty industries over three decades. We address concerns about causality in several ways, including exploiting a 1979 policy shift that spurred venture capital fundraising. We find that increases in venture capital activity in an industry are associated with significantly higher patenting rates. While the ratio of venture capital to R&D averaged less than 3% from 1983-1992, our estimates suggest that venture capital may have accounted for 8% of industrial innovations in that period.

The Government as Venture Capitalist: The Long-Run Impact of the SBIR Program

Government programs to finance small firms have attracted little empirical attention. This article examines the largest U.S. initiative, the Small Business Innovation Research program. Using a unique database, the author shows that program awardees grew significantly faster than matched firms over a decade and were more likely to attract venture financing. The superior performance of awardees was confined to firms in regions with substantial venture capital activity and was pronounced in high-technology industries. Multiple awards did not increase performance. These results suggest that awards played an important role in certifying firm quality but also that distortions of the award process occur. Copyright 1999 by University of Chicago Press.

The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry

The authors examine the determinants of control rights in biotechnology alliances through three case studies and a quantitative analysis. P. Aghion and J. Tirole (1994) argue that control rights will be assigned so as to maximize the value of the final output as long as the R&D firm has sufficient financial resources. Consistent with this framework, the allocation of control rights to the R&D firm increases with the firms financial resources. The empirical evidence regarding the relationship between control rights and the stage of the project at the time the alliance is signed is more ambiguous. Copyright 1998 by Blackwell Publishing Ltd

What is behind the recent surge in patenting?1

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Patenting in the Shadow of Competitors

This article empirically examines the patenting behavior of new biotechnology firms that have different litigation costs. I show that firms with high litigation costs are less likely to patent in subclasses with many other awards, particularly those of firms with low litigation costs. This pattern is consistent with the literature on costly litigation, which suggests that firms that have high litigation costs will take greater precautions to avoid litigation. These results are robust to a variety of control variables and modifications that seek to test alternative explanations.

An Analysis of Compensation in the U.S. Venture Capital Partnership

In this paper, we analyze the structure of compensation in US venture capital partnerships. We contrast a learning model that extends Gibbons and Murphy (1992) to a situation in which a venture capitalist and an investor split the expected gains from investment with a signalling alternative. Empirical evidence from 419 U.S. venture capital partnerships formed between January 1978 and December 1992 is generally consistent with the four primary predictions of the learning model. Compensation is bunched, with 81 percent of the sample funds sharing between 20 and 21 percent of the profit. The compensation of new and smaller funds shows considerably less variation than older and larger funds. Compensation of older and larger funds is significantly more sensitive to performance than compensation of newer and smaller funds. Finally, funds that focus on early-stage and high-technology investments have higher base compensation, consistent with the greater effort required to monitor these projects.

The Economics of Technology Sharing: Open Source and Beyond

This paper reviews our understanding of the growing open source movement. We highlight how many aspects of open source software appear initially puzzling to an economist. As we have acknowledged, our ability to answer confidently many of the issues raised here questions is likely to increase as the open source movement itself grows and evolves. At the same time, it is heartening to us how much of open source activities can be understood within existing economic frameworks, despite the presence of claims to the contrary. The labor and industrial organization literatures provide lenses through which the structure of open source projects, the role of contributors, and the movements ongoing evolution can be viewed.

WHEN BUREAUCRATS MEET ENTREPRENEURS: THE DESIGN OF EFFECTIVE `PUBLIC VENTURE CAPITAL' PROGRAMMES

Recently public efforts to finance small high-technology firms have proliferated. We review the motivations for these efforts and make some preliminary observations about their design. We explore the underlying challenges that the financing of young growth firms poses, the ways that specialised financial intermediaries address them, and the rationales for public efforts to finance these companies. The final section makes a set of observations about the ways in which the structure of these efforts can most effectively complement private sector activity. A frequent fault in programme design is the presumption that technological criteria can be divorced from business considerations when evaluating firms. Copyright Royal Economic Society 2002

The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements

This article examines covenants in 140 partnership agreements establishing venture capital funds. Despite the similar objectives and structures of these funds and the relatively limited number of contracting parties, the agreements are quite heterogenous in their inclusion of covenants. We examine two complementary hypotheses that suggest when covenants will be used. Covenant use may be determined by the extent of potential agency problems: because covenants are costly to negotiate and monitor, they will be employed only when these problems are severe. Alternatively, covenant use may reflect the supply and demand conditions in the venture capital industry. The price of venture capital services may shift if the demand for venture funds changes while the supply of fund managers remains fixed in the short run. The evidence suggests that both factors are important. This is in contrast to previous studies which have either focused exclusively on costly contracting or provided only weak support for the effects of supply and demand on contracts.

Do Equity Financing Cycles Matter?: Evidence from Biotechnology Alliances

While the variability of public equity financing has been long recognized, its impact on firms has attracted little empirical scrutiny. This paper examines one setting where theory suggests that variations in financing conditions should matter, alliances between small R&D firms and major corporations: Aghion and Tirole [1994] suggest that when financial markets are weak, assigning the control rights to the small firm may be sometimes desirable but not feasible. The performance of 200 agreements entered into by biotechnology firms between 1980 and 1995 suggests that financing availability does matter. Consistent with theory, agreements signed during periods with little external equity financing that assign the bulk of the control to the corporate partner are significantly less successful than other alliances. These agreements are also disproportionately likely to be renegotiated if financial market conditions improve.