VC-backed startups that created the most knowledge spillovers were led by an experienced inventor team that held a patented technology at the time they received their first round of investment. The researchers also found that 'complex' product technology (e.g., computers) creates more spillover than startups that use a 'discrete' product technology (e.g., drugs). The researchers contend that discrete product technologies need less associated patents and have less incentive to work with other companies. In comparison, startups focused on complex product technologies are more likely to need industry partners to achieve the final product and create incentive to work with business in close proximity.
Methodology: To quantify knowledge spillover, the researchers developed a new method for identifying a set of additional companies — the spillover pool — that could potentially influence that company's innovation process. The new method combines information on a firm’s technology with information on the closeness of different technologies, based on patent citations. After identifying the spillover pools for both startup and established companies, the researchers calculated a matrix of all patent citation flows between technology classes and used it to determine the relevant pool of companies likely to be affected by spillovers. Through the new matrix-based model, the researchers contend that they were able to more accurately identify each company’s spillover than previous models because it not only includes potential spillover pool companies that are active in the same technology area, but are active in related technologies. The study was conducted using patent data from the National Bureau of Economic Research with firm level data of venture capital-financed companies and established companies in the U.S. from 1979 to 1999.