Financing open and distributed innovation: studying venturecapital investment in open source start ups

This paper empirically investigates that how the financing patterns of high-tech entrepreneurial firm vary depending on the appropriability regime. High-tech entrepreneurial ventures are financially constrained and encounter severe problems in attracting external financing to support their innovation activities. These firms lack a track of record, while their knowledge-intensive innovation projects are characterized by high uncertainty and information asymmetries, which make it difficult for external investors to evaluate their future prospects. In addition, high-tech entrepreneurial ventures usually are short of tangible assets that can be pledged as collaterals. Consequently, their access to traditional sources of financing such as borrowing is limited, while venture capital (VC) is considered of crucial importance. It is expected that difficulties in attracting external financing are more severe for high-tech entrepreneurial ventures, which operate under a weak appropriability regime. Indeed, these firms suffer from higher uncertainty and information asymmetries in comparison with their peers that operate under a tight appropriability regime. The research on financing of high tech entrepreneurial firms has focused on role of IPR as a signal of quality, but left the issue of how high-tech entrepreneurial ventures finance their innovation depending on appropriability regime rather under-remarked. This paper compares venture capital (VC) financing patterns of entrepreneurial ventures doing business with open source (OSS start ups, weak appropriability) and entrepreneurial ventures doing business with proprietary software (proprietary start ups, tight appropriability ). Based on a sample of 174 software VC-backed entrepreneurial ventures, we find that OSS ventures are significantly different than proprietary ones regarding the age at the first investment. But we cannot claim that there are differences across two groups in case of syndication, syndication size and heterogeneity of investors regarding the type of investors