What is it about?

If venture capital is different from commercial banking, venture capitalists (VCs) are expected to specialize in the financing of innovation - that is focus on financing the kinds of ventures that are less likely to secure financing from banks. If the financing of innovation (innovation focus) is the raison d'etre for venture capital, there will not be anything surprising about VCs' engagement in such activities. VCs that do better than other VCs at discovering, financing, and growing innovative ventures will, however, be regarded as having superior ability and as such will be conferred with superior market reputation.

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Why is it important?

The study provides evidence that investors do not find a focus on innovation to be surprising, providing empirical evidence that venture capital differs significantly from commercial banking. The study further finds VCs that excel at discovering, financing, and growing innovative ventures are conferred with market reputation. In addition to these findings, the study provides theoretical conditions that enable distinctions between systematic ability and idiosyncratic ability within venture capital markets. These findings provide evidence that, consistent with predictions of financial economics theory, venture capital complements bank financing within a developed country economy.


The finding in this study that models of VCs' innovation focus generate the best measures of VCs' idiosyncratic ability provides additional evidence that ability within venture capital markets is defined relative to the discovery, financing, and growing of innovative ventures. In light of the importance of innovation for economic development, these findings are of extreme economic importance, particularly to developing and emerging countries.

Dr Oghenovo A Obrimah
Fisk University

Read the Original

This page is a summary of: How important is innovation for venture capitalists’ (VCs’) market reputation?, The Quarterly Review of Economics and Finance, August 2016, Elsevier,
DOI: 10.1016/j.qref.2015.11.007.
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