Problem
Venture capital (VC) investors are thought to fund the big, risky ideas that drive long-term growth. VC is the money that funded companies like Microsoft, Uber and Airbnb. VC-backed startups are responsible for a disproportionately large share of new jobs and new products in the US economy. But it wasn’t clear whether the quality of ideas that VC investors choose to fund changes during a recession, and whether this amplifies or dampens the pro-cyclical nature of economy-level innovation.
Science
We used data on venture capital financing from the Refinitiv VentureXpert database to identify the subset of the 2.68 million patents filed at the US Patent and Trademark Office (USPTO) between 1976 and 2017 were associated with a company that was backed by venture capital. How often a patent is later cited by other inventors is a widely used measure of how important that invention turns out to be. We then compared the quality and quantity of patents filed by VC-backed startups to those of non-VC backed firms and studied how this difference varied across venture capital hubs and across business cycles.
Outcome
Our findings show that patents filed by VC-backed startups are far more likely to be influential than the average patent. But during recessions, that quality advantage shrinks sharply. The effect is concentrated in Silicon Valley, Boston and New York City. Outside those hubs, there is no measurable decline in patent quality during recessions at all. The decline is driven by VC investors choosing to fund less ambitious new companies, not by existing companies becoming less inventive during recessions.
Change
Our research shows that VC amplifies downturns in the economy. The most ambitious, early-stage innovation in the US falls hardest and fastest when the economy contracts, and the effect is concentrated in the places that produce the most influential inventions. Our results suggest this is driven by the fact that during downturns, the difficulty in raising new funds pushes VC investors face to support existing companies in their portfolios shift their attention away from the riskiest new ideas to those that are closer to profitability. The most innovative startups pay the price. Moreover, if investors in hubs tend to fund higher-risk startups during normal times, their investments will be associated with more novel technologies during booms, when follow-on capital appears plentiful. However, the higher risk tolerance makes VC investment in hubs especially vulnerable to the decline in later-stage capital availability during contractions, leading to the stronger cyclicality of VC-backed innovation in hubs.
Sabrina Howell, Harvard Business School; Josh Lerner, Harvard Business School; Ramana Nanda, ³Ô¹ÏºÚÁÏ Business School; Richard Townsend, University of California San Diego, July 2026.