Effects of venture funding on innovation: The case of minimally invasive surgery

Emily Cox

Stanford University

emilycox@stanford.edu

How do resources impact innovation?  Organizational theorists have studied this question from the perspectives of acquisition, retention and deployment of resources .  One of the most studied relationships between resources and innovation is the impact of R&D investment on innovative output.  Despite the understanding that resources are needed to develop and commercialize innovative technologies it continues to be particularly difficult for young firms to find resources to innovate .  High costs of capital and difficulty in raising it, make understanding the relationship between financial resources and innovation in young firms particularly crucial .  However, basic questions about the impact of funding on innovation in young firms remain unresolved because we do not understand how resources impact innovation in young firms:  “[Do] incumbent firms dominate because they are more innovative or because entrants are too financially constrained to compete with them? ?”

Despite the fact that the relationship between resources and innovation is not well understood in young firms, the majority of research has focused on this relationship in established firms .  Such studies, though valuable, focus mainly on established firms and measure innovation as a function of internal resource allocation in the form of R&D expenditure.  This focus excludes young firms which have yet to go public. Unlike established firms which usually allocate internal funds to innovation, young firms typically accept financial and other resources from a variety of investors over time, complicating the relationship between financial resources and innovation .  Young firms seek financial resources from external investors in order to fund their early operations .  Despite the fact that these early investment relationships shape a variety of organizational outcomes, their impact on innovation in young firms is not well understood.  Yet the impact of funding source on young firm innovation is important; ventures account for a disproportionate amount of innovative activity in the U.S. economy but it is not completely understood why this is so .  As a first step in addressing this empirical gap I propose to explore how funding relationships impact innovation in ventures.  Specifically I ask the following research question: How do investors impact innovation in young firms?

In response I build on work from two theoretical lenses which focus on the impact of external ties on young organizations.  Both agency theory and the inter-organizational tie perspective suggest that ties to external resource providers may influence the course of innovation within young organizations.  Despite this shared focus, the underlying assumptions about organizations and ties are radically different in these two theories, leading to different predictions about the impact ties have on innovation.  

To assess the effects of venture funding on innovation at the firm level I first conceptualize different aspects of the relationship between investors and young firms that may impact innovation.  Specifically, I look at how partner attributes, tie attributes, and network position may impact innovation.  Next, I form hypotheses about how each of these three factors may impact innovation.  I then test the hypotheses over a 20-year period on a sample of ventures in the medical device industry.  The impact of funding is examined via two dependent variables: a venture's ability to commercialize a product, and the speed with which it does so.