Patent as a quality signal in entrepreneurial finance : a look beneath the surface

Abstract

We examine the value of patents on Chinese firms' access to venture capital (VC). We find that the patent applications (grants) of firms significantly increase their likelihood of obtaining VC funding in the following year(s), particularly for high-quality patents in high-tech industries. Depending on investment, patent quantity significantly improves the size of VC investment and firm valuation. This effect is pronounced in first-round investment, strong intellectual property protection regions, during periods of loose monetary policy, and state/corporate VC. Overall, we support the use of patent as a quality signal in attracting entrepreneurial finance outside the US and warrant the conditions it holds.