Patent Activity of Start-Ups and the Structuring of Venture Lending Contracts

This paper empirically examines the effect of patents on capital costs in venture lending contracts. Based on a proprietary dataset entailing 119 venture lending contracts issued by a European venture lending fund between 2002 and 2009 in Europe, the United States, and Israel, we conduct the first quantitative empirical analysis on venture lending as an innovative form of financing for entrepreneurial fLrrns. Our results show that the presence of at least one granted or pending patent negatively influences direct （credit spread） and indirect （warrant coverage） costs of venture lending contracts. Thus, the presence of patents conveys information and is a signal of quality to the payoff distribution of the venture loans. Furthermore, we show that the company development stage negatively influences the relation between patents and capital costs, i.e., in later stages, patents seem to represent a less relevant quality signal than in earlier stages.