Venture Capital and the Diffusion of Knowledge

Abstract

I estimate the impact of venture capital (VC) on knowledge diffusion by comparing patent citations before and after companies secure VC. I find that a patent's citations increase following VC financing, particularly those made by other companies also financed by the same VC investor. Instrumental variables estimates exploiting variation in the assets of pension funds that allocate capital to VC suggest a causal interpretation of the findings. I argue that by certifying commercial value, VC facilitates knowledge diffusion and thus generates an externality on innovation. The findings help explain why VC is more effective in stimulating innovation than corporate R&D.