The Impact of Venture Capital on Innovation

Does venture capital foster productive innovation, and if so, how? Is the impact of venture capital on innovation very large? These questions are not only of theoretical interest: answering them correctly is crucial for designing the best public policies on innovation. Although it accounts for a rather low proportion of total entrepreneurial financing, notably compared to bank finance1, venture capital is widely regarded as a key factor in the successful performance of the U.S. in terms of innovation, providing a model that has inspired emulation efforts in many other countries. From this perspective too, it is important to understand the model well, and how it works. This chapter begins by reviewing the empirical evidence on the impact of venture capital on innovation. We identify some of the key challenges to empirical research in this area, and discuss the methods that have been used to address them. Our review is by no means exhaustive, but several findings emerge clearly.