Venture Capital and tnhe Diffusion of kNowledge

Coauthor(s): Juanita Gonzalez-Uribe
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Abstract
Does the diffusion of knowledge depend on the environment in which ideas are developed? This paper explores this question by examining the role of Venture Capitalists (VCs) on knowledge diffusion, as measured by patent citations. Using a data-set of patents filed by companies before they are financed by a VC, I estimate the increase in citations to those patents after the VC investment relative to a group of matching patents in the same technology. To isolate the causal effect, I exploit variation in VC investments that results from fluctuations in public pension assets in the home-state of VC firms. This is a plausible instrumental variable (IV), as fluctuations in state pension assets influence local VC investments, but their effect on citations should be uniform across local patents in the same technology. I find that VCs have a causal effect on the diffusion of patented knowledge. Additional results point to two channels: VCs facilitate knowledge flows among companies in their portfolios, and they certify the value of innovations to the general public.