Venture Capitalists and the Patenting of Innovations

We model patent-signaling by informed venture capitalists to incumbent acquirers of developed innovations. We show that, to signal, venture capitalists develop more patents with higher impact than incumbents would. A tightening of patenting requirements by the patent offices, such as an increase in the required inventive step, increases the pool of unprotected early-stage ideas, which venture capitalists are better at judging than incumbents, and decreases the number and breadth of patented claims needed to separate highly valuable from less valuable innovations. Consequently, such a tightening would make venture capitalists more likely to back entrepreneurs and increase entrepreneurial incentives to innovate.