Rapidly Evolving Technologies and Startup Exits

This paper examines startups’ positioning within technological cycles. We use patent text to measure whether innovation pertains to a technological area that is rapidly evolving or stable. We show that innovation in rapidly evolving areas (i.e., early in the cycle) substitute for existing technologies, whereas innovation in stable areas (i.e., later in the cycle) complement them. Our new measure is distinct from existing characterizations of innovation and is economically important. We find that startups in rapidly evolving areas tend to exit via initial public offering, thus remaining independent, consistent with technological substitution. In contrast, startups in stable areas tend to sell out, consistent with technological complementarity and synergies. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4362 .