How Does Initial Public Financing Influence Private Incentives for Follow-On Investment in Early-Stage Technologies?

29 Pages Posted: 8 Dec 2007

See all articles by Andrew Toole

Andrew Toole

United States Patent and Trademark Office

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Abstract

One common rationale supporting public financing programs for small firms is that initial public investment creates incentives for follow-on private investment. However, there does not appear to be a unified statement in the literature describing how initial public investment creates incentives for follow-on private investment. Focusing on external private investors, we use a two-stage net present value model to identify four effects from initial public investment on the private decision for follow-on investment. Our empirical analysis uses a sample of non-venture backed firms entering the SBIR program to examine how reduced risk, the number of SBIR awards, and size of initial public investment influence the likelihood of follow-on venture capital investment. We find the probability of follow-on venture capital investment is more likely when firms reach Phase II of the program, is less likely as firms win multiple Phase I and Phase II awards, and is more likely as the size of initial public investment in Phase I increases.

Keywords: R&D, real options, uncertainty, public subsidies, innovation

JEL Classification: O31, H25, L60

Suggested Citation

Toole, Andrew A and Turvey, Calum G., How Does Initial Public Financing Influence Private Incentives for Follow-On Investment in Early-Stage Technologies?. Journal of Technology Transfer, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1066805

Andrew A Toole (Contact Author)

United States Patent and Trademark Office ( email )

Alexandria
VA 22313-1451
United States

Calum G. Turvey

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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