How does initial public financing influence private incentives for follow-on investment in early-stage technologies?
2009
Toole, Andrew A. | Turvey, Calum
One common rationale supporting public financing programs for small firms is that initial public investment creates incentives for follow-on private investment. However, there does not appear to be a unified statement in the literature describing how initial public investment creates incentives for follow-on private investment. Focusing on external private investors, we use a two-stage net present value model to identify four effects from initial public investment on the private decision for follow-on investment. Our empirical analysis uses a sample of non-venture backed firms entering the SBIR program to examine how reduced risk, the number of SBIR awards, and size of initial public investment influence the likelihood of follow-on venture capital investment. We find the probability of follow-on venture capital investment is more likely when firms reach Phase II of the program, is less likely as firms win multiple Phase I and Phase II awards, and is more likely as the size of initial public investment in Phase I increases.
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