Shanghai Tech University
Huaxia Middle Road 393, Pudong New District
Institutional Affiliation: ShanghaiTech University
NBER Working Papers and Publications
|October 2018||Moving Beyond the Valley of Death: Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms|
with Chirantan Chatterjee, Matthew J. Higgins: w25202
Venture capitalists (VCs) traditionally invest in risky, early-stage innovations. Recent research suggests, however, that VCs may be herding into less risky, later-stage projects. Such a shift can create funding gaps for early-stage firms. Can regulation reverse this trend by providing information that may reduce the risk of early-stage investments? Using the regulatory setting of the European Union and the passage of the Orphan Drug Act (EU-ODA), we examine this question in the biopharmaceutical industry. We provide causal evidence that VCs are more likely to invest in early-stage biopharmaceutical firms operating in sub-fields disproportionately affected by EU-ODA. We also find that the level of syndication declined for early-stage investments and exit performance improved. Importantly, ...