This paper constructs a model where entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We first show that aggressive development of a basic innovation by better informed...

Our model reconciles seemingly contradictory empirical evidence on venture capital activity. Despite the venture capital-backed companies' superior long-run performance, stock markets react more negatively to their acquisitions than to other private acquisitions. Moreover, venture capital...