Does Fraudulent Science Hurt Biomedical Entrepreneurship? Evidence From Venture Capital

Information Systems and Operations Management

Speaker: Yi Ding, from Warwick School of Management

Room T-006

Abstract

"Biomedical entrepreneurs increasingly rely on venture capital for growth and survival. Bearing the ‘liability of newness’, biomedical startups are susceptible to environmental risks that adversely affect venture capital inflows and damage the commercialization prospects of potentially life-saving innovations. Complementing prior research which explores environmental risks, our study examines how failure in the governance of biomedical science affects venture capital funding. Our findings indicate that retractions of biomedical articles negatively affect the venture capital funding received by biomedical startups. Venture capitalists (VCs) tend to draw negative generalizations about biomedical technologies from the retractions. Interestingly, we find that such negative effects even extend to startups working on biomedical technologies unrelated to the retracted articles, highlighting the potency of the generalization effects. Furthermore, we find the negative effects to be stronger for risk-averse VCs, i.e., VCs that have prior experience of failed investments in biomedical startups, offer debt-based financing, and operate in less mature financial markets. Ultimately, our research alerts biomedical entrepreneurs to the institutional risk posed by academic retractions and offers insights for a more strategic selection of VCs for fundraising."

Keywords: biomedical entrepreneurship, academic retractions, venture capital, legitimacy