Hall and Lerner (2009), reviewing venture-capital studies, report evidence consistent with financing affecting innovation while explicitly identifying selection and causal-identification problems; this supports investigating financial additionality, not assuming all funding causes useful innovation.

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Kortum and Lerner (2000), by way of contrast, examine whether these patterns can be discerned on an aggregate industry level, rather than on the firm level. They address concerns about causality in two ways. First, they exploit the major discontinuity in the recent history of the venture capital industry: as discussed above, in the late 1970s, the U.S. Department of Labor clarified the Employee Retirement Income Security Act, a policy shift that freed pensions to invest in venture capital. This shift led to a sharp increase in the funds committed to venture capital. This type of exogenous change should identify the role of venture capital, because it is unlikely to be related to the arrival of entrepreneurial opportunities. They exploit this shift in instrumental variable regressions. Second, they use R&D expenditures to control for the arrival of technological opportunities that are anticipated by economic actors at the time, but that are unobserved to econometricians. In the framework of a simple model, they show that the causality problem disappears if they estimate the impact of venture capital on the patent-R&D ratio, rather than on patenting itself.

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Even after addressing these causality concerns, the results suggest that venture funding does have a strong positive impact on innovation. The estimated coefficients vary according to the techniques employed, but on average a dollar of venture capital appears to be three to four times more potent in stimulating patenting than a dollar of traditional corporate R&D. The estimates therefore suggest that venture capital, even though it averaged less than three percent of corporate R&D from 1983 to 1992, is responsible for a much greater share—perhaps ten percent—of U.S. industrial innovations in this decade. These findings have been supported by recent working paper by Mollica and Zingales (2007), who also use an instrumental variable approach based on state pension fund resources to look at the relationship of venture capital and innovation and find a strong relationship.

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Both venture funding and innovation could be positively related to a third unobserved factor, the arrival of technological opportunities. Thus, there could be more innovation at times that there was more venture capital, not because the venture capital caused the innovation, but rather because the venture capitalists reacted to some fundamental technological shock which was sure to lead to more innovation. To date, only a handful of papers have attempted to address these challenging issues. The first of these papers, Hellmann and Puri (2000), examines a sample of 170 recently formed firms in Silicon Valley, including both venture-backed and non-venture firms. Using questionnaire responses, they find empirical evidence that venture capital financing is related to product market strategies and outcomes of startups. They find that firms that are pursuing what they term an innovator strategy (a classification based on the content analysis of survey responses) are significantly more likely to obtain venture capital and also obtain it more quickly. The presence of a venture capitalist is also associated with a significant reduction in the time taken to bring a product to market, especially for innovators. Furthermore, firms are more likely to list obtaining venture capital as a significant milestone in the lifecycle of the company as compared to other financing events.