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

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.

Yujin Kim, Chirantan Chatterjee, and Matthew J. Higgins

NBER

October 2018

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