“Founder-friendly” venture financings and nontraditional venture investors have both flourished over the past decade. Using detailed contract data, we study open-end mutual funds investing in private venture-backed firms. We posit that conflicts between early-stage venture investors and liquidity-constrained later-stage ones influence the classic agency problems affecting entrepreneurs and investors. We find that mutual funds with more stable funding are more likely to invest in private firms and that financing rounds with mutual fund participation have stronger redemption, stronger IPO-related rights, and less board representation. These findings are consistent with our conceptual framework.

Using a difference-in-differences approach, we study how intellectual property right (IPR) protection affects innovation in China in the years around the privatizations of state-owned enterprises (SOEs). Innovation increases after SOE privatizations, and this increase is larger in cities with strong IPR protection. Our results support theoretical arguments that IPR protection strengthens firms’ incentives to innovate and that private sector firms are more sensitive to IPR protection than SOEs. Received June 17, 2015; editorial decision November 23, 2016 by Editor Andrew Karolyi.