Catering Innovation: Entrepreneurship and the Acquisition Market

Start-up entrepreneurs depend on M&A markets to exit VC investments. I test a novel catering theory of innovation: Does the market structure of potential acquirers impact entrepreneurial decision-making? Using CrunchBase and LinkedIn data, I find that a standard deviation increase in acquirer market concentration decreases the propensity to become an entrepreneur by 4%, suggesting that fragmented markets are appealing entry markets. Likewise, a standard deviation increase in acquirer concentration increases the catering of entrepreneurs by 9%, as measured by technological overlap with potential acquirers. Catering comes at the cost of breakthrough innovation (16% decrease), the key determinant of economic growth.