Too Costly to Convince: how do startups deliver radical innovation via partnership?

Despite the importance of partnership for commercialization of innovations in startups, it is not easy for startups to persuade an established firm to collaborate on a completely novel idea. If information transfer about the innovations is too costly, startups may avoid pursuing radically new projects. Our paper examines the impact of policy signals on the novelty of the innovations pursued by startups. In the context of the Orphan Drug Act(ODA), we find that startups develop more radical therapies when policy signals help them to convince potential partners of the value of prospective therapies. While the likelihood of partnership increases, the timing of partnership is delayed in ODA-affected fields.