How patent signals affect venture capital: The evidence of bio-pharmaceutical start-ups in China

Innovation is the key to the economic development, and enterprises are the foundation of innovation. Bridging both these elements is the venture capital, who often rely on patents as one way to assess the potential of a start-up. Patents have the power to send signals about a start-up's capabilities, future prospects, and their right to produce and profit from specific innovations. To understand the influence these signals have on the amount of venture capital funding a start-up receives, we analyzed the three main types of signals a patent can send technological, commercial, and legal along with other "noise" factors that may affect a signal's transmission. Each of the hypotheses put forward examine how the various attributes of a patent or a start-up act as signals to venture capitalists, and one regression model were constructed as tests. Using the bio-pharmaceutical industry in China as a subject, the results of this empirical research show that legal signals have the greatest influence over venture capital funding levels, closely followed by technological signals. Commercial signals have less impact. Further, invention patents, particularly public invention patents, have a significant impact on venture capital decisions. This research has a significant meaning to start-up as venture capitalist, who can choose a right way to transmit or decode the patent signal in venture capital.