[Research Seminar 2019.11.06] Effect of Venture Capital Investments on Product Failures: Evidence from Recalls in the Medical Device Sector

Abstract

In this study, we argue that a misalignment of interests between ventures and venture capitalists (VCs) may arise and that VCs can negatively affect ventures’ product innovation quality in the long run. We show that VC-backed ventures experience a higher rate of product failures than non-VC-backed ventures after these ventures go public. We further show that VC-backed ventures’ rate of product failures increases as VCs’ incentive to hasten their ventures’ early exits increases. Our findings suggest that to increase the chances of successfully exiting ventures through initial public offerings, VCs may pressure their ventures to expedite the product development process, exposing the ventures to product quality problems. We find empirical support for our hypotheses using a dataset on the product recalls of medical device ventures.