Inorganic growth in innovative firms: evidence from patent acquisitions Sungjoung Kwon LeBow College of Business, Drexel University
[email protected] December 8, 2019 Job market paper Abstract: Startup firms are better suited to exploration (radical breakthrough) than exploitation (incremental improvements). Nonetheless, I find that approximately 10% of VC-backed companies acquire external patents while still private. They are neither low-quality firms nor firms with low patent output, lending little support to the hypothesis that patent acquisition is a response to low productivity. Rather, patent litigation risk appears to play an important role. Startup firms are significantly more likely to buy external patents when they are sued for patent infringement or exposed to a high threat of litigation. Using a difference-in-differences design around the Supreme Court decision Alice Corp. vs. CLS Bank, I show that firms whose patent litigation risks are reduced the most become significantly less likely to buy patents. Consistent with these findings and with the litigation risk preventing firms from reaching their full potential, firms buying patents are significantly more likely to be acquired rather than to go public. Keywords: Entrepreneurial finance, venture capital, intellectual property rights JEL classification: L26, G24, O34 1. Introduction Startup firms are distinct from mature firms along key dimensions. Unlike incumbents, startup firms generally have more limited resources and weaker market power. However, as suggested by Pavitt and Wald (1971) and Acs and Audretsch (1987), their small size allows flexibility, which in turn provides relative advantages in new industries. Rapidly evolving product designs in these industries make mature firms’ advantages of economies of scale and scope less valuable (Vernon, 1966).