Catering Innovation: Entrepreneurship and the Acquisition Market

Innovation in the start-up market is a key determinant of economic growth. But what determines an inventor’s decision to begin a new venture and his or her subsequent innovation? This paper analyzes the role of the financial market of acquisitions. After documenting its increasing importance as the dominant exit path for entrepreneurs, I test a novel catering theory of innovation: Does the market structure of potential acquirers have a measurable impact on inventors’ start-up decisions? I construct a new dataset of early stage start-ups using the uniquely broad coverage of CrunchBase data. I disambiguate and match the resulting data to employment data from LinkedIn and to the entire universe of patent data. Using the prior citation history of entrepreneurs for exogenous variation, I construct a formal proxy variable and employ the Heckman selection model to establish causality. I find that a one standard deviation increase in acquirer market concentration decreases the inventor’s propensity to become an entrepreneur by 4%. This first result suggests that fragmented markets are appealing entry markets. My main finding is that a one standard deviation increase in acquirer concentration and market size increases the quality of patents, as measured by citations per patent, and the catering of entrepreneurs, as measured by technological overlap with potential acquirers. The magnitudes suggest that 5-16% of entrepreneurial innovation can be attributed to the influence of acquisition markets, particularly in the information technology and biotechnology industries. ∗UC Berkeley, Haas School of Business. Email: xinxin [email protected]