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Moving Beyond the Valley of Death: Regulation and Venture Capital Investments in Early-Stage Biopharmaceutical Firms

Yujin Kim, Chirantan Chatterjee, Matthew J. Higgins

NBER Working Paper No. 25202
Issued in October 2018, Revised in May 2019
NBER Program(s):Productivity, Innovation, and Entrepreneurship

Can regulation reduce risks associated with investing in early-stage firms? Using the passage of the European Orphan Drug Act (EU-ODA), we examine this question in the biopharmaceutical industry. We provide causal evidence that venture capitalists (VCs) are more likely to invest in early-stage firms operating in sub-fields disproportionately affected by EU-ODA. The switch to early-stage investments appears strongest among VCs that previously faced greater levels of information asymmetry. We also find that the level of syndication declined for early-stage investments and exit performance improved. We conclude discussing the implications of our findings for public policy, entrepreneurship and innovation.

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Document Object Identifier (DOI): 10.3386/w25202

 
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