Patent disclosure and venture financing: The impact of the American Inventor's Protection Act on corporate venture capital investments

We investigate the effects of patent disclosure on corporate venture capital (CVC) investments in technology startups. Toward this end, we focus on the passage of the American Inventor's Protection Act (AIPA), which mandated public disclosure of patent applications. Theoretically, technology disclosure enables CVCs to better evaluate startups and thus, could increase the likelihood of investment relations. Conversely, such disclosure may already satisfy the technology-acquisition objectives of CVCs, reducing CVCs willingness to form an investment relation after disclosure. Our empirical analysis finds that patent disclosure through AIPA increased the likelihood of receiving CVC investments for startups—specifically in industries where patents have higher information significance. We provide evidence that the observed pattern is mainly driven by a reduction of information constraints regarding startups with patent applications. Managerial Summary Receiving corporate venture capital (CVC) funding is an important success factor for technology startups. Would disclosure of a startup's innovation increase or decrease its chance of receiving CVC funding? On the one hand, disclosure by startups would reduce uncertainty and search costs for CVC investors, which could increase the chance of CVC funding. On the other hand, such a disclosure would reveal the startups' technology to the corporations, which would in turn reduce corporate incentive to use funding as a window to the startup's technology. Thus, disclosure could also reduce the chance of CVC funding of startups. In this paper, we study the above issue by examining the case of the American Inventor's Protection Act (AIPA), which mandated public disclosure of patent applications. Our results suggest that innovation disclosure significantly improves the likelihood of CVC funding of startups.