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Local Bias in Venture Capital Investments
Abstract
This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of U.S. VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and specialization in technology industries increase VCs' local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.
... Number of firms a VC has invested in Bygrave [67] ; Cable and Shane [68] ; Walske et al. [69] Number of industries a VC has invested in Yang et al. [70] Number of rounds a VC has invested in Yang et al. [70] Number of countries a VC has invested in Yang et al. [70] Number of provinces a VC has invested in Yang et al. [70] Number of seed stages a VC has invested in Yang et al. [70] Number of initial stages a VC has invested in Yang et al. [70] into the influence and positioning of nodes (e.g., VCs) within the network. Degree centrality captures the overall connectedness of a node to other nodes, representing its potential to access and disseminate information and resources. ...
... Number of firms a VC has invested in Bygrave [67] ; Cable and Shane [68] ; Walske et al. [69] Number of industries a VC has invested in Yang et al. [70] Number of rounds a VC has invested in Yang et al. [70] Number of countries a VC has invested in Yang et al. [70] Number of provinces a VC has invested in Yang et al. [70] Number of seed stages a VC has invested in Yang et al. [70] Number of initial stages a VC has invested in Yang et al. [70] into the influence and positioning of nodes (e.g., VCs) within the network. Degree centrality captures the overall connectedness of a node to other nodes, representing its potential to access and disseminate information and resources. ...
... Number of firms a VC has invested in Bygrave [67] ; Cable and Shane [68] ; Walske et al. [69] Number of industries a VC has invested in Yang et al. [70] Number of rounds a VC has invested in Yang et al. [70] Number of countries a VC has invested in Yang et al. [70] Number of provinces a VC has invested in Yang et al. [70] Number of seed stages a VC has invested in Yang et al. [70] Number of initial stages a VC has invested in Yang et al. [70] into the influence and positioning of nodes (e.g., VCs) within the network. Degree centrality captures the overall connectedness of a node to other nodes, representing its potential to access and disseminate information and resources. ...
Existing research suggests that elite clubs exist in venture capital markets, but a standard for determining their size and composition is lacking. This paper addresses this challenge by using the weighted k-means sorting algorithm to construct a research framework for elite clubs. Validating the framework with investment events data from China's venture capital market (2001–2018), intriguing findings emerge. The ranking of Venture Capitalists (VCs) follows a power-law distribution, providing evidence for elite clubs' existence. The analysis identifies a turning point in the score curve, serving as a valuable indicator for club boundaries. Elite clubs demonstrate relatively high stability, maintaining advantages and elite status in future competitions. Empirical validation confirms the proposed framework's superior stability compared to existing methods. Importantly, elite club members outperform non-elites significantly. This paper effectively identifies elite clubs in the Chinese venture capital market, helping other VCs recognize potential partners, access high-quality information, and enhance investment performance.
... Regional funding gaps are particularly evident with respect to Venture Capital (VC) investments (Martin et al., 2005;Mason, 2007;Martin et al., 2002), as the most relevant funding for newly established high-tech firms (Colombo et al., 2010;Giraudo et al., 2019;Caviggioli et al., 2020;Alperovych et al., 2020;Colombelli et al., 2020), on which we focus in this paper. In general, regional disparities in VC availability have been accounted by the joint occurrence of two phenomena: a local bias, due to the tendency of financiers to invest the largest part of their portfolio where they choose to locate (Cumming and Dai, 2010;Zook, 2002;Lutz et al., 2013); a clustering pattern, leading risk-capital investors to concentrate in major financial cities (Lee and Luca, 2019;Florida and Mellander, 2016;Mason, 2007). In turn, both phenomena can be explained by the importance of the spatial proximity between investor and investee, in mitigating the information asymmetries and the transaction costs entailed by their financial relationship (Van Osnabrugge, 2000;Zook, 2002). ...
... The extant literature about VC usually refers to the distance between investors and ventures in generic terms, as a factor that facilitates both the pre-investment activities of the former -that is, the identification and appraisal of investment opportunities -and their post-investment ones -amounting to the monitoring of the identified ventures and 1 The majority of existing studies on geography (as of other proximities) in VC investments in fact mainly refer to the U.S. (Florida and Mellander, 2016;Carlson and Chakrabarti, 2007;Cumming and Dai, 2010;Sorenson and Stuart, 2001;Zook, 2002), the UK (Lee and Drever, 2014;Mason and Pierrakis, 2013;Martin et al., 2005;Mason and Harrison, 1992;Harrison and Mason, 2002 ) and the German (Lutz et al., 2013;Bender, 2010;Fritsch and Schilder, 2006;Martin et al., 2005) markets, with few world (Tykvová and Schertler, 2014) and European-wide studies (Martin et al., 2002). to the supply of value-added services to them (Sorenson and Stuart, 2001). ...
... Since the seminal work by (Sorenson and Stuart, 2001), this has been mainly done by looking at the networks that VC firms form through the use of syndicated investing-facilitates 4 : not only do they enable the financial relationship at stake, but they also decrease the space-based constraints posed by tangible proximities. Drawing on this contribution, subsequent studies have found that the social embeddedness of Venture Capitalists, measured through heterogeneous social and organizational ties, crucially affect the unfolding and the performance of the investment (Meuleman et al., 2017;Teten and Farmer, 2010;Milosevic, 2018) as well as the probability that VC invest in spatially (Tykvová and Schertler, 2014;Sorenson and Stuart, 2001), institutionally (Tykvová and Schertler, 2011) or technologically distant firms (Meuleman et al., 2017;Tykvová and Schertler, 2014;Cumming and Dai, 2010). ...
This paper aims to investigate the role that different forms of proximity have in the access to Venture Capital (VC) by Innovative Startup Companies (ISC). By referring to the population of Italian innovative startups, we find that tangible (spatial) proximity account for this matching, but more in functional than in geographical terms. Industrial proximity between the two actors matters too, and makes the role of functional proximity less binding for the matching. The greatest correlation emerges with respect to a relational kind of proximity, due to the closeness between partners in organisational and social terms.
... First, VC investors provide critical managerial and financial support that spurs innovation and success in US entrepreneurial companies (Gompers et al., 2020;Hsu, 2006). While prior research focuses on understanding VC investment decisions and portfolio company performance (Cumming and Dai, 2010;Hsu, 2004Hsu, , 2006, how the geographical structure of social networks shapes VC investment decisions remains unexplored. Second, while institutional investors often favor large, more liquid, and low-risk investments, the investment portfolios of VC firms consist of small, illiquid, and risky businesses whose disclosed information is limited (Falkenstein, 1996;Gompers and Metrick, 2001;Sahlman, 1990;Stuart and Sorenson, 2005;Winton and Yerramilli, 2008). ...
... Second, our study relates to the literature considering geographical proximity as the primary determinant of VC investment decisions. Cumming and Dai (2010) document local biases in VC fund allocation in the US, with VC capital primarily directed towards firms adjacent to VC locations. Bernstein et al. (2016) also show that nearly one-third of portfolio companies are close to zero miles from their lead VC firms. ...
... To address this issue, VC firms have adopted various monitoring mechanisms and restrictive contractual terms, such as stage financing, syndication, and convertible securities, to alleviate the unwanted consequences of a lack of information about entrepreneurial companies (Stuart and Sorenson, 2005;Shane and Cable, 2001). VC firms also succumb to a "20-minute" rule, where they prefer to fund startup companies located within a 20-minute drive from their offices (Cumming and Dai, 2010) because physical proximity allows VC firms to easily monitor and interact with their portfolio companies. However, the abovementioned local investment bias and screening and monitoring strategies can cast aside high-quality yet geographically distant ventures, leaving a suboptimal set of investment opportunities available to VC firms, eventually leading to inefficient investments. ...
This study examines how the geographical structure of social networks shapes venture capital (VC) investment decisions. We find that VC firms invest more in portfolio companies in socially connected regions. The effect is more pronounced among independent, smaller, less reputable, early-stage-focused VC firms and those not from a VC hub. We further document that social connectedness lowers the likelihood of a successful exit since it induces VC firms to undertake suboptimal investment decisions. Overall, our findings highlight the role of social connectedness in constituting the geographical differences in VC firms' capital allocation and investment outcomes.
... They provide evidence that spatial proximity has an impact on the likelihood of an investment for (1) very small and very large investments and (2) less experienced venture capitalists. Cumming and Dai (2010) find that venture capital funds exhibit a significant local bias, with half the investments located within a 233-mile radius. The local bias was smaller for reputable venture capital funds having a larger syndication network, which alleviates information asymmetries. ...
... Searching high-quality ventures, transacting with them, and monitoring them are easier and cheaper if the costs of these activities to investors are low. To reduce these costs, venture capitalists tend to invest in local firms (Cumming & Dai, 2010) because screening, contracting, and controlling a local firm is usually easier and cheaper. Given that equity crowdfunding, versus venture capital financing, takes place on the Internet, the question arises whether equity crowdfunding lowers search, transaction, and control costs for everyone, making physically close investments practically unnecessary. ...
... Analyzing the introduction of new airline routes, Bernstein et al. (2016) show that on-site visits of venture capitalists enhance the performance of start-up companies. Therefore, for angel-like investors, local investments do not constitute a bias or behavioral anomaly but represent a rational strategy, which allows them to reduce the transaction costs of screening and monitoring a business (Chen et al., 2010;Cumming & Dai, 2010). We thus hypothesize the following: ...
We use data on individual investment decisions to analyze whether investors in equity crowdfunding direct their investments to local firms and whether specific investor types can explain this behavior. We then examine whether investments exhibiting a local bias are more or less likely to fail. We show that investors exhibit a local bias, even when we control for those with personal ties to the entrepreneur. In particular, we find that angel‐like investors and investors with personal ties to the entrepreneur exhibit a larger local bias than regular crowd investors. Well‐diversified investors are less likely to suffer from this behavioral anomaly than investors with personal ties to the entrepreneur. Overall, we show that investors who direct their investments to local firms more often pick start‐ups that run into insolvency, which indicates that some local investments in equity crowdfunding constitute a behavioral anomaly rather than a rational preference. Moreover, our results reveal that platform design is an important factor determining the scope of the behavior anomaly.
... The literature that contributes most to the topic of local bias comes from the finance and accounting fields. After proving the existence of local bias in the context of venture capital investments and peer-to-peer leading platforms, previous studies have further summarized the mechanism behind this phenomenon and its possible consequences (Cumming and Dai, 2010;Hornuf et al., 2020;Lin and Viswanathan, 2016). They have summarized that local bias is caused by two reasons: behavioral and economic (Cumming and Dai, 2010;Graham et al., 2009). ...
... After proving the existence of local bias in the context of venture capital investments and peer-to-peer leading platforms, previous studies have further summarized the mechanism behind this phenomenon and its possible consequences (Cumming and Dai, 2010;Hornuf et al., 2020;Lin and Viswanathan, 2016). They have summarized that local bias is caused by two reasons: behavioral and economic (Cumming and Dai, 2010;Graham et al., 2009). Economic reasons refer to individuals favoring home state products or services or to investors who are more likely to invest in borrowers near their birthplace owing to higher economic payoffs. ...
... For offline marketplaces, consumers are likely to purchase home-state products mostly to save logistics costs, whereas in the environment of online crowdfunding markets, investors achieve high payoffs only if they can gather more information about home-state borrowers to help them decide more rationally (Graham et al., 2009;Hortaçsu et al., 2009). By construct, behavioral reasons always originate from consumers' own preference or judgment, and such reasons have been identified as a type of bounded rationality or cognitive bias (Cumming and Dai, 2010). Accordingly, if local bias is mostly driven by behavioral reasons, then it may cause economic inefficiencies in the marketplace (Lin and Viswanathan, 2016;Hornuf et al., 2020). ...
Prior studies have documented local bias in online product and online crowdfunding markets. By collecting a unique longitudinal dataset covering 91,693 Airbnb properties, we find evidence that local bias also exists in peer-to-peer rental platforms. We also prove that local bias has a negative consequence on guest satisfaction and property reputation. In addition, a focus on moderating effects reveals that (a) local bias is less prominent in properties with high prices, and (b) uploading detailed host descriptions can suppress the appearance of local bias and reduce its negative consequences on the online ratings of properties. Therefore, information asymmetry at least partially drives this phenomenon. The findings contribute to the literature and platforms in practice.
... Hence, venture capitalists may prefer investing in enterprises that are geographically close to them (Belderbos et al., 2018;Tian et al., 2020). More importantly, geographic proximity promotes information exchange between VC institutions and enterprises, and reduces investment activities' transaction and oversight costs (Cumming & Dai, 2010). Numerous studies investigate the effects of geographic distance on venture capitalists' investment decisions and portfolio firms' performance (Belderbos et al., 2018;Bengtsson & Ravid, 2015;Chen et al., 2011;Cumming & Dai, 2010;Dushnitsky & Lenox, 2005;Hochberg et al., 2015;bib_IW_2005Ivković & Weisbenner, 2005Keil et al., 2008;Kolympiris et al., 2018;Tian, 2011;Zahra & Hayton, 2008). ...
... More importantly, geographic proximity promotes information exchange between VC institutions and enterprises, and reduces investment activities' transaction and oversight costs (Cumming & Dai, 2010). Numerous studies investigate the effects of geographic distance on venture capitalists' investment decisions and portfolio firms' performance (Belderbos et al., 2018;Bengtsson & Ravid, 2015;Chen et al., 2011;Cumming & Dai, 2010;Dushnitsky & Lenox, 2005;Hochberg et al., 2015;bib_IW_2005Ivković & Weisbenner, 2005Keil et al., 2008;Kolympiris et al., 2018;Tian, 2011;Zahra & Hayton, 2008). ...
Cultural distance is an important factor for the success of venture capital (VC) investments. Using a large sample of Chinese VC events, this study examines how cultural proximity between VC investors and portfolio firms, as measured by a unique indicator using Chinese dialects, affects the performance of venture capitalists while exiting portfolio firms. We find that VC investors with cultural proximate portfolio firms are more likely to exit successfully. Our study further indicates that VC investors with less cultural proximity are more likely to obtained improved financial returns when they successfully exit from the investment.
... Coval, Moskowitz, 1999, 2001 et du capital-investissement (e.g. Bodnaruk, 2009 ;Cumming, Dai, 2010). Empiriquement, Coval et Moskowitz (1999, 2001, Grinblatt et Keloharju (2001) ou Huberman (2001) montrent que les investisseurs préfèrent investir dans des entreprises qui leur sont proches géographiquement, suggérant un biais domestique d'investissement. ...
... Géographie dans le financement participatif : application de la théorie financière Une grande partie du biais domestique peut s'expliquer par un phénomène bien connu dans la littérature, à savoir que la majorité des projets sont financés par les réseaux sociaux (Gallemore et al., 2019) et plus précisément par la famille et les amis, soit près de 70 % selon Lee et Persson (2016). Par exemple, Cumming et Dai (2010) constatent, dans le capitalrisque, que le biais domestique s'estompe lorsqu'on contrôle le profil de l'investisseur. Théoriquement, Lee et Persson (2016) font valoir que les investisseurs individuels sont prêts à accepter des rendements inférieurs au marché (ou négatifs) en raison de leurs liens sociaux avec l'emprunteur. ...
La littérature rappelle régulièrement l’intérêt des citoyens à financer des porteurs de projet. Lorsque ces contributeurs viennent à financer des projets via des plateformes de financement participatif, ils bénéficient, d’après la littérature, d’une asymétrie d’information réduite, d’un coût d’information proche de zéro et d’un accès à une myriade de projets. La théorie financière définit un biais local selon lequel les investisseurs préfèrent détenir des titres géographiquement proches. La théorie moderne du portefeuille de Markowitz (1952) considère cette situation comme une anomalie décisionnelle. Inversement, les investisseurs pourraient s’engager rationnellement dans des entreprises locales s’ils percevaient des rendements supérieurs à la moyenne, si la proximité géographique leur permettait d’obtenir des informations privilégiées sur l’entreprise (et ce faisant de réduire l’asymétrie d’information) ou les rendait plus à même d’exercer un droit de contrôle. À travers notre recherche sur une microbrasserie locale
rochelaise, nous étudions le rôle du biais local et domestique (cercle familial et amical) dans les choix de financement participatif.
... While the need for monitoring by VC firms is well understood; understanding and measuring the magnitude of monitoring has not been appropriately probed so far. While there have been a few attempts at assessing the intensity of monitoring (Cumming and Dai, 2010;Gompers and Lerner, 2004), it has been largely based on proxies and not on any direct and measurable index. ...
... This is because a lesser time gap implies more monitoring efforts and hence may be considered a measure of the quantum of monitoring. Cumming and Dai (2010) regard the level of geographical distance between the VC and the venture to be an index of the level of monitoring. A smaller geographic distance implies the need for an intensive monitoring and hence can be treated as a proxy for involvement index. ...
... While the need for monitoring by VC firms is well understood; understanding and measuring the magnitude of monitoring has not been appropriately probed so far. While there have been a few attempts at assessing the intensity of monitoring (Cumming and Dai, 2010;Gompers and Lerner, 2004), it has been largely based on proxies and not on any direct and measurable index. ...
... This is because a lesser time gap implies more monitoring efforts and hence may be considered a measure of the quantum of monitoring. Cumming and Dai (2010) regard the level of geographical distance between the VC and the venture to be an index of the level of monitoring. A smaller geographic distance implies the need for an intensive monitoring and hence can be treated as a proxy for involvement index. ...
... Our work relates to the ongoing research on family firms and corporate outcomes by studying how family control shapes external venturing done through CVC. In particular, we study three dimensions of CVC that feature prominently in the literature: syndication (Lerner, 1994;Keil et al., 2010;Tian, 2012), and geographic and industry proximity between parent firms and ventures (Chen et al., 2010;Cumming and Dai, 2010;Gompers et al., 2005Gompers et al., , 2009Hochberg et al., 2015;Li et al., 2023). We conjecture that the family control of parent firms has an influence on the extent to which the parent's CVC deal-making will be syndicated, the reputation of syndicate partners, and the extent to which the CVC program will invest in the same geography or industry of the parent firm. ...
... Organizations must operate on the understanding that investment decisions are reversible if circumstances change, or if they cannot be reversed, they are now-or-never propositions. (Cumming, 2010). When the organization exercises its choice by making an investment, it makes a decision to move forward with expenditures, the organization gives up the possibility of waiting for new information that may affect the desirability or timing of the investment; The investment cannot be withdrawn if market conditions change adversely (Altonji, 2012). ...
The research to identify the role of social capital and its components (relational, cognitive, and structural) in enhancing financial support for capital investments, which in turn will contribute to directing individuals working in private banks in the middle euphrates region to find the strengths and weaknesses in their performance in relation to the research variables. The questionnaire was adopted as a main tool in collecting data related to the field side of the study, and the sample size was (149), and many statistical methods were used in the research, such as standard deviations, arithmetic averages, with the help of programs (spss.var.27), and a set of conclusions were reached from the most important of which is that social capital has a correlation and a significant impact on capital investments, and the research concluded with a set of recommendations.
... From the private investment perspective, venture capital (VC) plays a key role in the ecosystem for supporting deep-tech ventures, particularly as it helps to overcome the problem of information asymmetry and to correct the risks of adverse selection (i.e., bad projects may succeed in raising funds) and moral hazard (i.e., high cash burn and careless management of funds by the executive team), inherent in deeptech projects (Hafied, Rachiq and Roulleau, 2021). However, this mode of financing remains elitist (Puri and Zarutskie, 2011) and subject to numerous biases (Cumming and Dai, 2010;Byrne and Griffit, 1973;Zhang, 2011;Brush, Greene, Balachandra and Davis, 2017); hence, it is important to explore the conditions of these funding resources in a country. ...
This report analyzes the strengths and weaknesses of the Spanish deep-tech ecosystem by applying the MIT iEcosystem model, which emphasizes five critical system inputs (i.e., human capital, funding, infrastructure, demand and culture/incentives) driving innovation capacity (I-Cap) and entrepreneurship capacity (E-Cap). The assessment of these inputs, both strengths and weaknesses, serves as the basis for key recommendations designed from a systems perspective to strengthen Spain’s deep-tech ecosystem. The MIT approach also emphasizes the role of cocreation and collaboration among key stakeholders (i.e., entrepreneurs, venture capitalists, universities, companies, and the government) as an approach to implementation. In addition, the report sets out to create an international benchmark of deep-tech plans based on other developed countries as an opportunity to compare current and future actions in Spain.
The report’s recommendations aim at creating the necessary critical mass to foster deep-tech entrepreneurship, as key factor i the competitiveness of the country.
The recommendations are to create:
1) An explicit Spanish deep-tech strategy (led and developed by the government).
2) A Spanish Association of industrial deep-tech clients (led by corporations).
3) A national club of deep-tech investors (led by venture capitalists).
4) An official deep-tech entrepreneurship and innovation school (led by Universities and PROs).
5) A deep-tech entrepreneurship summit (led by entrepreneurs).
... A successful exit by the investors is a critical part of the lifecycle of companies funded by external equity as it represents a return on capital for investors and increases their ability and willingness to identify new investment opportunities. The extant literature has explored the determinants influencing exit strategies including company, investor, and country characteristics (Lerner, 1994;Buehler et al., 2006;Giot and Schwienbacher, 2007;Cumming and Dai, 2010;Cumming and Johan, 2010;Espenlaub et al., 2015). Nonetheless, these analyses predominantly pertain to ventures backed by venture capital or private equity investors while leaving other investor types' impact on exits largely unexamined. ...
... Guo et al.[47] in their study on Kickstarter claim that there is home bias; however, their findings seem to reveal the opposite: The distance between initiator and contributor is much bigger than in traditional venture capital funding as reported, for example, by Cumming and Dai[29]. ...
... The role of distance as a frictional force is evident in entrepreneurial finance as well. VCs for example are more likely to invest in ventures located nearby (Cumming & Dai, 2010). The argument that is presented as a plausible explanation is the presence of a negative relation between cost and distance. ...
Plain English Summary
The growth of a young company is considered to be a driver of economic growth. Its growth depends on the capacity of the entrepreneur at raising capital. There are regional disparities regarding capital allocation. Companies located in regions with poor economic conditions are less likely to raise capital. Equity crowdfunding may have the capacity to promote regional democratization because it offers a wider set of investors and all investments take place online. This article argues that equity crowdfunding may offer a better chance to entrepreneurs located in high unemployment regions at raising capital. It may help them with the survival of their companies as well. Thus, the principal implication of this study is that entrepreneurs located in high unemployment regions may consider choosing equity crowdfunding as a financing option because they may stand a better chance at raising capital. It may decrease the likelihood of failure for their ventures as well.
... We calculate this variable based on Crunchbase data. Syndication is commonly used in previous studies (e.g., Block et al. 2019;Cumming and Dai 2010;Gu and Lu 2014). ...
Personality traits can determine business angels’ decision to engage in syndication (i.e., co-investing with other investors). We conduct a quasi-random replication of Block et al. (J Bank Finance 100:306–327, 2019), who document an influence of the Big 5 personality traits on syndication. We employ a machine learning-based approach to operationalize business angels’ personality traits in a comprehensive sample of 4449 investments made by 1241 US business angels. Our main analysis underlines that personality traits determine syndication behaviour but highlights that different measurement tools may produce different results. We extend these findings by conducting complementary analyses that further nuance the relation between personality and syndication in business angel investing. These further analyses consider interaction effects between business angels’ personality traits and sociodemographic characteristics (e.g., gender, age, and investment experience). We also apply a closed-language tool to measure personality-related variables. Overall, our findings highlight the importance of replication studies in entrepreneurship research, especially when tools leveraging artificial intelligence are used.
... An established stream of research shows that cross-national distances influence firms' cross-border investment decisions (Chakrabarti & Mitchell, 2016;Dai & Nahata, 2016;Ragozzino & Reuer, 2011). Studies show that high distances increase information asymmetries, making it harder to find suitable investment opportunities (Cumming & Dai, 2010) and carry out due diligence (Nahata, Hazarika, & Tandon, 2014). Issues like these explain why investors often focus on business opportunities near home (Ahern, Daminelli, & Fracassi, 2015;Coval & Moskowitz, 1999). ...
Previous research on cross-border investments has shown the importance of choosing the right focal market—a target country in which a firm invests. International business scholars have also noted that cross-border investments frequently concentrate in regions. However, the factors affecting investment agglomeration within a region have yet to be determined. Building on theoretical insights from the Uppsala internationalization model, we propose two effects that can significantly impact investment agglomeration within a region: (1) the focal effect, linked to cumulative investment experience in a focal market, and (2) the neighborhood effect, related to cumulative investment experience in the region where a focal market is located. We also examine how the size of these effects is moderated by cross-national distance. To test our theoretical arguments, we use a dataset of private equity firms that made investments in three emerging market regions—Latin America, Southeast Asia, and Eastern Europe—from 1996 to 2011. The results support all our hypotheses. We contribute to the literature on regional internationalization by providing new insights that complement the Uppsala internationalization model.
... Although VC intervention may contribute to the development of firms' basic innovations, previous studies have found that VCs play an important role in the development of firms' basic innovations. However, previous studies have found that VCs prefer local firms in the prescreening stage (Cumming and Dai, 2010;Zhang Xueyong et al., 2016), resulting in high-quality projects that are difficult to be favoured by VCs and have weaker innovation potential. ...
Venture capital is a source of living water for enterprises' basic innovation. In this paper, we select investment events in East and Central China from 2005-2019, and use the Yangtze River Delta integration as a natural experiment to test the effect of integration policies on the promotion of basic innovation by VCs by applying a multi-period DID model. The study finds that: (1) regional integration enhances the level of basic innovation of VC-intervened firms; (2) regional integration policies shorten the institutional distance between VCs and invested firms' cities, which in turn enhances the promotional effect of venture capital on the basic innovation of firms; (3) under the background of regional integration, the growth of basic innovation of state-owned VC-intervened firms and strategic emerging firms is more significant than that of private VC-intervened firms and traditional firms; (4) the growth of basic innovation of state-owned VC-intervened firms and strategic emerging firms is more significant than that of private VC-intervened firms. emerging firms have faster growth in basic innovation. The findings of the study are of great significance in identifying the extent of the impact of integration development strategy on VC's promotion of enterprises' fundamental innovation, and in targeting the direction of development of China's venture capital, and in promoting the improvement of the innovation capacity of real enterprises.
... To capture such effect, we control for the maximum size of all the investing funds in the focal round. 37 In addition, previous research suggests that geographic proximity positively affects effectiveness of monitoring by VC firms on entrepreneurial firms (Bernstein, Giroud, and Townsend (2016), Cumming and Dai (2010)) and, thus, is likely to affect the likelihoods of switching. Therefore, we include two binary variables, DIS_TO_ VC<50_MILES and DIS_TO_VC_50_100_MILES, indicating if the geographic distance between VC firms and an entrepreneurial firm is less than 50 miles or between 50 and 100 miles, respectively. ...
We argue that syndicates associate venture capitalists (VCs) with uneven skill levels in order to lower their expected gains from threatening to stop financing: Non-continued participation would send a milder negative signal to alternative financiers. This can explain the empirical observations that i) early-round syndicates regularly associate VCs with different levels of experience and ii) follow-on syndicates often involve none of the early-round VCs. Consistent with the theory, we find empirically that the heterogeneity of VC experience levels in a syndicate is i) negatively related to the extent to which the founders of the VC-backed firm are professionally well connected and ii) positively related to the likelihood of syndicate switching in a later round.
... VCs tend to invest locally and are hyper concentrated in a few geographical regions (e.g., Chen et al., 2010;Cumming and Dai, 2010). Taking Nevertheless, the assumption of exclusion restrictions is not empirically verifiable. ...
In equity crowdfunding, it is unclear whether unsophisticated inexperienced crowd investors are capable of correctly interpreting ventures’ quality signals, even strong ones like affiliation with venture capital investors. Because of cognitive limitations, crowd investors may consider signals revealing platform’s private information on issuers’ quality to be more informative than ventures’ signals. Our findings based on 550 equity crowdfunding offerings in the U.S. show that the positive effect of affiliation with VCs on the success of equity crowdfunding campaigns is mediated by platforms’ choice of an equity compensation (i.e. their “skin in the game”) but only very partially. We deduce that crowd investors’ cognitive limitations may be less severe than one may believe.
JEL Classification: D26, G24, L26, M13
... Venture capital frms (VCs) are specialized fnancial intermediaries that provide capital and value-added services to innovative startups with good growth prospects and vigorously promote the development of strategic emerging industries [1][2][3][4]. Te VC industry has long been local [5,6]. Geographical proximity has given VCs and portfolio companies the ability to enhance social relationships, trust, and cooperation through closer, accessible, and informal communication [7,8]. ...
This paper investigates the impact of cross-border investment of domestic venture firms (VCs) on the overseas listings of their domestic portfolio companies. Using a sample of 1,439 domestic VCs’ first-round domestic investment events collected by Crunchbase and PEDATA, we find that the more cross-border investment experience domestic VCs have, the more likely their domestic portfolio companies are to go public outside China. The findings remain robust after using the instrumental variable method to eliminate endogeneity, the Heckman two-stage regression method to eliminate sample selection bias, and the exclusion of a portion of the sample for reregression. In addition, we further find that foreign VCs participating in follow-on financing play a mediating role in the relationship between the cross-border investments of domestic VCs and the overseas listings of their portfolio companies. This paper reveals the critical path for domestic VCs to go out and bring in foreign VCs to promote overseas listings of domestic firms. The findings of this paper are critical to the layout of domestic VCs’ internationalization strategy and the sustainable development of domestic firms.
... As stated previously, screening for socially responsible assets increases search and monitoring costs. These costs can be reduced when investors are geographically close to an asset, because geographic closeness reduces the costs of screening (Cumming & Dai, 2010;Hornuf et al., 2022). Thus, local investments in SRI could ultimately generate better performance. ...
In this article, we use a meta‐analysis to examine the performance of socially responsible investing (SRI). We find that, on average, SRI neither outperforms nor underperforms the market portfolio. However, in line with modern portfolio theory, we find that global SRI portfolios outperform regional subportfolios. Moreover, high‐quality publications, publications in finance journals and authors who publish more frequently on SRI are all less likely to report SRI outperformance. In particular, we find that including more factors in a capital market model reduces the likelihood that a study will find SRI outperformance.
... As stated previously, screening for socially responsible assets increases search and monitoring costs. These costs can be reduced when investors are geographically close to an asset, because geographic closeness reduces the costs of screening (Cumming & Dai, 2010;Hornuf et al., 2022). Thus, local investments in SRI could ultimately generate better performance. ...
... Evidence from the venture financing literature suggests that: (i) country proximity may influence VC investment decisions (Hain et al., 2016); (ii) entrepreneurs may have certain preferences and evaluate potential financiers before accepting their funding offers (Bengtsson and Wang, 2010;Drover et al., 2014); and (iii) startup founders and VC partners could be matched based on personal similarities (Bengtsson and Hsu, 2010). Additionally, the decisions of business angels (BAs) and VCs may be influenced by local bias (Croce et al., 2022;Cumming and Dai, 2010). Unfortunately, data un- availability about the accelerators in the sample does not allow us to control for such factors. ...
Building on the upper echelon and signaling theories, we hypothesize that the perceptions about corporate ethical behavior in the country of origin of a venture’s founders may provide an important piece of information to the selection committees of impact-oriented accelerator programmes that serves as a signal for the trustworthiness and opportunistic behavior of the founding team. In turn, this could have implications for the admission decision into the
programmes. Using a sample of over 16,000 early-stage ventures from 131 countries that applied to 287 accelerator programmes, we find evidence consistent with this hypothesis. Our results show that better perceptions about the ethical behavior of the founding team enhance the likelihood to be admitted into an impact-oriented accelerator programme. The role of perceived ethics appears to be stronger in case of programmes that guarantee some kind of
financing. Further analysis shows that the strength of both formal and informal institutions moderates the relationship between the ethical perceptions and the admission likelihood.
... That is because gathering information, monitoring progress, and providing input are particularly important to investors in earlystage ventures, and the costs of these activities are sensitive to distance, which encourages the entrepreneur to access financial tools such as crowdfunding. Most of the empirical evidence to date supports these claims [68][69][70][71]. But it is also interesting to note that in recent years this relationship has change as a result of the innovation process and the use of the Internet. ...
This paper explores the role of local knowledge spillover and human capital as a driver of crowdfunding investment. The role of territory has already been studied in terms of campaign success, but the impact of territory on the use of financial sources like equity crowdfunding is not yet known. Using a sample of 435 equity crowdfunding campaigns in 20 Italian regions during a 4-year period (from 2016 to 2019), this paper evaluates the impact of human capital flow on the adoption of crowdfunding campaigns. Our results show that inbound knowledge in the region, measured in terms of ability to attract national and international students, has a significant effect on the adoption of crowdfunding campaigns in the region itself.
... What tends to happen between entrepreneurial firms and VCs is more akin to a bandwagon effect and 'word-of-mouth' behaviour (Nahata, 2008;Tumasjan, Braun and Stolz, 2021). The heterogeneity among VCs in the professional field (Brinster and Tykvová, 2021), geographical distance (Cumming and Dai, 2010;Zhang and Gu, 2021) and investment experience (Bottazzi, Da Rin and Hellmann, 2008;Sørensen, 2007) may also cause differences in understanding and grasping market information, resulting in inefficient information exchange in the investment process. These phenomena are likely to be strongly affected by market capacity. 2 Market capacity is a pivotal determinant of information asymmetry and matching efficiency. ...
This paper examines imperfect matching between venture capital (VC) firms and entrepreneurial firms in the VC market. We find an anomaly of imperfect matching evidenced by an inflection point of the matching structure in the Chinese VC market. When the market capacity is within a specific critical range, the greater the market capacity, the greater the degree of matching; when the market capacity exceeds a certain critical point, the greater the market capacity, the smaller the degree of matching. We further show that the degree of efficient information exchange in the VC market provides a powerful explanation for this anomaly. Our findings advance the research on matching structures at the market level, explain imperfect matching in the Chinese VC market from a unique angle and provide valuable policy implications for the development of VC markets.
... As pointed out in [15], human investors are inherently biased and intuition alone cannot consistently drive good decisions. A better approach should leverage big data to • debias the decisions, so that the individual investment decision made for a particular startup is expected to drive lower risk and higher ROI; ...
Startups often represent newly established business models associated with disruptive innovation and high scalability. They are commonly regarded as powerful engines for economic and social development. Meanwhile, startups are heavily constrained by many factors such as limited financial funding and human resources. Therefore the chance for a startup to eventually succeed is as rare as ``spotting a unicorn in the wild''. Venture Capital (VC) strives to identify and invest in unicorn startups during their early stages, hoping to gain a high return. To avoid entirely relying on human domain expertise and intuition, investors usually employ data-driven approaches to forecast the success probability of startups. Over the past two decades, the industry has gone through a paradigm shift moving from conventional statistical approaches towards becoming machine-learning (ML) based. Notably, the rapid growth of data volume and variety is quickly ushering in deep learning (DL), a subset of ML, as a potentially superior approach in terms capacity and expressivity. In this work, we carry out a literature review and synthesis on DL-based approaches, covering the entire DL life cycle. The objective is a) to obtain a thorough and in-depth understanding of the methodologies for startup evaluation using DL, and b) to distil valuable and actionable learning for practitioners. To the best of our knowledge, our work is the first of this kind.
... I explain what the space is about and people are really impressed by the facility . . . It's to come here, meet people, have people come here, show the space, show that area where we can do product development and testing -ENT20 Moreover, the physical location of the incubator can also indicate important geographic predictors of success, such as the venture's ease of access to investor capital (Cumming and Dai 2010), and to markets and customers (Acs and Varga 2002). Accordingly, participants commented: ...
Entrepreneurial support organizations (ESOs), such as university business incubators, offer tangible and intangible resources to start-ups. Prior research has theorized how these resources create value for entrepreneurs. However, resources are generally studied objectively and as independent dimensions of the incubation process. This qualitative study seeks deeper understanding of how incubation creates value by exploring the subjective lived experience of incubated entrepreneurs. Taking a grounded theorizing approach, we interviewed 44 entrepreneurs involved in ten university incubation programmes in Toronto, Canada. The emergent conceptual model suggests that value is created by the interconnection between tangible and intangible resources. The physical environment (Place) serves as a space for engaging in meaningful interactions among peers, coaches, volunteers and interns (People). Together, they provide an organizational context that fosters embeddedness. The People-Place nexus creates value in three ways: it supports venture development through entrepreneurial learning, which helps the entrepreneur refine the opportunity and start-up the business; it creates community, which fosters collaboration and mutual support for entrepreneurs as they address start-up challenges; and it signals legitimacy to external stakeholders, which facilitates access to resources. Opportunities for future research examining the interrelationship between incubating and embeddedness are suggested. Policy and managerial implications for ESOs are discussed.
... Erik Stam (2008) examines the relationship between the entity of entrepreneurship and innovation, and explains the theories and experiences in innovative areas, entrepreneurship, and economic growth. Policy making to develop entrepreneurship is one of the goals of governments (Cumming, 2010). It can be accompanied by other goals such as educational policies, financial policies, and other policies ( Kim, 2012). ...
Purpose
As technological entrepreneurship has distinctive characteristics and needs particular conceptualizations, it is also important to have specific theoretical developments about its technological entrepreneurship. Studying the related domains like entrepreneurship and technology can be helpful in this path; however, their differences should be considered as well. The purpose of this study is to design a model in support of technological entrepreneurship. Since financing is considered as the main restriction on creating and developing technological entrepreneurship, the focus of this study is the research of financial policies of technological entrepreneurship..
Design/methodology/approach
This research is from the qualitative point of view and in terms of the purpose of application-development that has been done in the second part. At the first step, Iran’s (IRI) national comprehensive policies have been studied from 1993 to 2020; out of 52 documents, 7 were relevant, of which 38 policies were eventually selected. Then, policy statements were explored, and open coding and categorization has been done through theme analysis approach to attain fundamental themes and organizational themes. In the second step, the themes were extracted in the form of soft research method with the approach of interpretive structural modeling to level the financing policies of technological entrepreneurship in Iran.
Findings
The results show that the most important factors influencing financing and entrepreneurship in Iran are increasing the productivity of goods and services, supporting entrepreneurship, increasing the efficiency of monetary policies that are in the first level.
Research limitations/implications
Research limitations include access to upstream documents, strategies, administrative and organizational coordination to study documents.
Practical implications
These findings are very important to scholars, the policymakers and technological entrepreneurship operators in designing their financing strategies. The results show that the most important factors influencing financing and entrepreneurship in Iran are increasing the productivity of goods and services, supporting entrepreneurship, increasing the efficiency of monetary policies.
Originality/value
To the best of the author’s knowledge, this is the first study to explore the explanation and classification of technology-based entrepreneurship financing policies in Iran. Moreover, the findings of this study would prove useful in detailed studies of financing policies in the Middle Eastern countries as well.
... The VC industry has long been a local industry (Cumming and Dai, 2010) because geographical proximity to portfolio companies allows for effective monitoring and value-added services (Mäkelä and Maula, 2006). However, with the increased competition in the domestic VC market, more and more VC firms are moving out of the country to look for investment opportunities abroad (Chemmanur et al., 2016). ...
In recent years, venture capital (VC) cross-border syndication has shown an obvious growth trend. Based on the existing studies, this paper explores the impact of VC cross-border syndication on corporate innovation. We also examine the mediating roles of cross-border quadratic relationship closure (CBQRC) formed by the strategic cooperation relationship between the respective portfolio companies of domestic and foreign VCs. This paper conducted an empirical analysis to test our hypotheses using a sample of first-round investments in domestic firms by domestic VC firms from 2014 to 2016. Results show that the more investment events of VC cross-border syndication or the more partners of VC cross-border syndication, the more likely it is to have a significant positive impact on the innovation of domestic portfolio companies. CBQRC plays a mediating role between VC cross-border syndication on corporate innovation. Results remain robust after removing endogeneity using the instrumental variables approach and removing sample selection bias using Heckman two-stage regression. Results deepen the understanding of the relationship between VC cross-border syndication and corporate innovation and provide essential guidance to domestic VC firms promoting corporate innovation in open partnerships.
... Despite technological advancements, geographical proximity still matters in small business lending (Brevoort and Wolken 2009;Agarwal and Hauswald 2010;Flögel 2018). Similarly, spatial effects on investment decisions are demonstrated by the portfolio decisions of socially responsible investment funds (Chen and Nainggolan 2018) and in the context of start-up finance such as venture capital investments (Martin et al. 2005;Cumming and Dai 2010;Lutz et al. 2013) or business angel financing (Herrmann and Avdeitchikova 2016). Yet, it is often not geographical proximity per se that has an impact. ...
An increasing number of small and medium-sized enterprises (SMEs) in the German organic agri-food sector involves citizens through different community financing models. While such models provide alternative funding sources as well as marketing opportunities to SMEs, they allow private investors to combine their financial and ethical concerns by directly supporting the development of a more sustainable food system. Due to the low level of financial intermediation, community financing is characterized by close relations between investors and investees. Against this background, we apply the proximity concept from economic geography to explore spatial and relational aspects of community financing in the German organic agri-food sector. Based on a qualitative multiple case study approach, we find that the relevance of proximity is twofold. While different forms of proximity between SMEs and their potential investors are key success factors, proximity is also considered as one desired outcome of community financing. Furthermore, our results reveal that the extent to which SMEs rely on particular proximity dimensions distinguishes two different approaches to community financing.
... A large portion of these empirical results can be explained by a phenomenon well known in the literature, namely that the majority of projects are funded by social networks (Gallemore et al., 2019), specifically from family and friends (F&F)-around 70% according to Lee and Persson (2016). Indeed, in venture capital, Cumming and Dai (2010) found a home bias that disappears when controlling for investor type: F&F. Lee and Persson (2016) theoretically argue that individual investors are willing to accept below-market or negative returns due to their proximity to the borrower. Additionally, social ties provide an effective means for investors to obtain private information that enhances the likelihood of obtaining funding (Shane & Cable, 2002). ...
The objective of this article is to explore the influence of home bias and the moderating role of social networks (and more particularly family and friends—F&F) in the crowdfunding of a microbrewery in a French region (a lucrative business that uses a territorial solidarity process). We have chosen the case study as methodology to show that neither home bias nor F&F have a significant influence on amounts paid by individuals in crowdfunding. The results are specific to the case studied and are comparable to those of social enterprise. They explain but also justify the behavioural diversity crowdfunding can induce. L’objectif de cet article est d’explorer l’influence du biais domestique et le rôle modérateur des réseaux sociaux (et plus particulièrement de la famille et des amis – F&A) dans le financement participatif (« crowdfunding ») d’une microbrasserie dans une région française (une entreprise lucrative qui utilise le processus de solidarité territoriale). Nous avons choisi l’étude de cas comme méthodologie pour montrer que ni le biais domestique ni les F&F n’ont une influence significative sur les montants payés par la foule. Les résultats sont spécifiques au cas étudié et sont comparables à ceux de l’entreprise sociale. Ils expliquent mais aussi justifient toute la diversité comportementale que le financement participatif peut induire.
... Syndicate with domestic VC is a more common investment approach for foreign VC to enter the Chinese capital market. From the perspective of foreign VC, including a local partner in the portfolio who is familiar with the investee company helps reduce the degree of information asymmetry caused by cultural differences and geographical distance during the transaction [24]. rough the syndicate, foreign VC not only provides financial support to their portfolio companies together with domestic VC but also jointly performs postinvestment supervision functions. ...
Taking Chinese startups backed by venture capital (VC) in 1997–2017 as the sample, this study investigates the impact of VC background on chief executive officer (CEO) replacement in portfolio companies. The results show that (1) compared to foreign VC, domestic VC is more likely to replace the CEO of the portfolio companies. (2) Syndicate with domestic VC can overcome the disadvantage of foreign VC geographically distant from the portfolio companies, and domestic VC as coinvestors can effectively monitor portfolio companies, increasing the possibility of CEO replacement. Heterogeneity analysis shows that the positive effect of VC background on CEO replacement exists in the subgroup of VC geographically proximate to the portfolio companies, indicating that geographic proximity to the portfolio companies helps VC more easily grasp the development of the portfolio companies and more likely to replace CEO. This paper reveals the differences in the behavior of VC in replacing CEO during the postinvestment management process, highlights the critical role of geographical proximity, and provides important management insights for VC and entrepreneurs.
... The UK has a centralised financial system that impedes growth opportunities for SMEs, particularly further away from London Lee & Brown, 2017). Firms located further away from financial centres are also less likely to access venture capital finance (Chen, Gompers, Aovner, & Lerner, 2010;Cumming & Dai, 2010;Martin et al., 2005) and to be listed on a stock exchange (Wójcik, 2009). Venture capital is an important source of funding for high growth, innovative start-ups that might disrupt industries and challenge dominant incumbents (Gompers & Lerner, 2001). ...
The thesis empirically studies drivers and determinants of incomes at the regional level in the United Kingdom. It draws on literatures in labour and macro economics, and examines these through a regional lens. The thesis contains three self-contained chapters. Chapter 2 studies the effect of labour mobility on local earnings in Great Britain in the context of large regional earnings differences. Using a panel of employee records, I estimate the effect of internal in- and out-migration on the earnings of employees who do not move. Over the course of three years, the effect of in-migration on earnings growth is positive, with no adverse effect from out-migration. These effects are larger in urban areas, consistent with agglomeration effects as the underlying mechanism. Chapter 3 considers the effect of growing industry concentration within the UK on regional earnings. Using detailed firm-level data, I show that the share of output produced by dominant firms has increased since 2002. While firms with market power pay higher wages, the labour share, the share of total value added earned by workers is lower. This is consistent with a rent-sharing model, whereby dominant firms charge mark-ups that are only partially shared with workers. In chapter 4, I study technological invention as a driver of employment growth for different skill groups in NUTS1 and NUTS2 regions in Germany, France and the UK. Invention, proxied by patenting, has a positive effect on graduate employment. Both graduate employment and patenting have positive effects on mid-skilled and non-graduate employment, but these effects tend to be temporary, with no persistent increase in employment. Looking at the three countries individually, the results are suggestive of significant differences that can be rationalised with reference to differences in labour market institutions and innovation systems.
... That is because gathering information, monitoring progress, and providing input are particularly important to investors in earlystage ventures, and the costs of these activities are sensitive to distance, which encourages the entrepreneur to access financial tools such as crowdfunding. Most of the empirical evidence to date supports these claims [68][69][70][71]. But it is also interesting to note that in recent years this relationship has change as a result of the innovation process and the use of the Internet. ...
This paper explores the role of local knowledge spillover and human capital as a driver of crowdfunding investment. The role of territory has already been studied in terms of campaign success, but the impact of territory on the use of financial sources like equity crowdfunding is not yet known. Using a sample of 435 equity crowdfunding campaigns in 20 Italian regions during a 4-year period (from 2016 to 2019), this paper evaluates the impact of human capital flow on the adoption of crowdfunding campaigns. Our results show that inbound knowledge in the region, measured in terms of ability to attract national and international students, has a significant effect on the adoption of crowdfunding campaigns in the region itself.
... There are controversies regarding the effects of private equity/venture capital (PE/VC) on IPO underpricing in the existing literature. On the one hand, private equities or venture capitalists could help reduce IPO underpricing by certifying the fundamental value of the IPO firm, providing better monitors, or reducing information asymmetry (Barry, Muscarella, & Peavy Iii, 1990;Cumming & Dai, 2010;Megginson & Weiss, 1991). On the other hand, PE/VC-backed IPOs may suffer more underpricing, since the PE/VC may receive some quid pro quo for leaving more money on the table or they may be establishing a reputation at the cost of IPO underpricing (Lee & Wahal, 2004). ...
This paper investigates the effects of underwriter reputation on initial public offering (IPO) underpricing in the Chinese Growth Enterprise Market. We find that IPO firms with prestigious underwriters have lower market-adjusted initial returns on average. We further find that prestigious underwriters reduce IPO underpricing by minimizing the time gap between the offering and listing, choosing high-quality firms to underwrite, and reducing information asymmetry between issuers and investors. In the presence of institutional investors, however, we find that more underpricing occurs, as these investors tend to obtain access to IPO shares at a higher price discount via private placements.
... We thus controlled for VCventure geographic distance, measured by the natural log (plus 1) of the geographical distance between the VC firm and the venture. We followed prior studies (e.g., Coval & Moskowitz, 1999;Cumming & Dai, 2010) in calculating the geographic distance based on the latitude and longitude of the zip codes for the venture and the VC. We logged the last three variables because they were highly skewed. ...
... Venture capitalist may use a bridge loan to extend the life of a firm to permit a trade sale. Cumming and Dai (2010) demonstrated that venture capitalists prefer to invest in companies which were physically close to their offices. Giot and Schwienbacher (2007) found that the success of a trade sale increased if there was one venture capitalist in proximity. ...
This thesis examined venture capital financing contracts as reference points,investment waves in venture investing and the use of bridge loans as a financing methodfor venture backed companies. In the first essay, a theoretical model forcontracts as reference points was proposed. This model proved a method to grantthe entrepreneur a surplus of returns to create a smoother relationship even though theVC had ex-ante bargaining power. This protects the VC firm if the value of the project dropsas the entrepreneur continues to apply effort due to the incentive from the increased share of surplus.For the initial investment in the project, most VC state that theyselected their investment based on the founding team and market size for the company.Through an analysis of venture investments over a 30-year periodwe were able to compute investment waves as found in mergers and acquisitions.The second essay explores the effect VC investment waves andthe social network created from investment syndicates had on the investment success.We provided evidence that the timing of the investment and the VC social network impacted the success rate of investments.In the final essay, short-term bridge loans were explored due to industry comment on their useand the fact that over 10 percent of venture investment transactions were bridge loans. Theanalysis provided evidence that companies with bridge loans had a very low success rate (0.7%) and that VC firms who used bridge loans had a lower success rate raising a follow-on fund.
Zemtsov S. Geography of Artificial Intelligence Technologies in Russia // Regional Research of Russia. 2024. Vol. 14. No. 4. Pp. 525–536 ||| The geography of innovation makes it possible to identify spatial patterns of creation, implementation, and diffusion of new technologies, but with the development of communications, an illusion appeared that space is insignificant. In accordance with the aim of the study, the article shows that creation and implementation of artificial intelligence (AI) as one of the radical innovations cannot be widespread. It will be concentrated in centers with high innovation potential and specialized tacit knowledge, where the intensity of knowledge spillovers is higher. In Russia, an education in AI can be obtained in 21 regions, research is conducted in 35, and technology is being developed in 40. The article proposes a rating of regional potential for AI creating, assessing scientific and technological development and density of the main elements of regional innovation ecosystems. The rating shows a high concentration of potential in the largest urban agglomeration, Moscow, and several creative cores: Moscow oblast, St. Petersburg, the Republic of Tatarstan, and Novosibirsk oblast. Sixteen centers have been identified capable of both creating and implementing certain AI technologies: Sverdlovsk, Nizhny Novgorod, Chelyabinsk, Samara, Tomsk, and Rostov oblasts, Krasnodar krai, etc.; 23 regions that are predominantly acceptor centers using AI advanced production technologies and 41 regions with minimal potential. Leading regions may receive priority attention and funding by investors. In acceptor regions, public policy priority may be given to supporting production automation, and in lagging regions, preference may be given to increasing the population’s receptivity to digital technologies.
The purpose of the work is a comparative analysis of corporate venture financing factors that influence the innovative activity of an enterprise. The object of research in the work is the system of financing innovative projects, and the subject of research is the factors influencing the results of the innovative activity of an enterprise. In the course of the work, the main tasks were solved, which are related to the analysis of factors of corporate ventures development and its growth points, the recognition of international trends in the corporate ventures development and the identification of key indicators of corporate venture financing which are necessary in the development of an effective system for financing innovative projects. The work shows the conditions and prerequisites for the development of corporate venture capitalism. The result of applying statistical methods (correlation analysis) is identification of four key factors of corporate venture financing that determine the innovative performance of the parent organization.
Для цитирования: Земцов С.П. Потенциал создания и внедрения технологий искусственного интеллекта в регионах России // Региональные исследования. 2024. № 1 (83). С. 34–47. DOI: 10.5922/1994-5280-2024-1-3 \\\
География инноваций позволяет выявлять пространственные паттерны создания, внедрения и распространения новых технологий, но с развитием коммуникаций возникает иллюзия незначимости пространства. В соответствии с целью исследования, в статье показано, что разработки искусственного интеллекта, как одной из прорывных технологий, не могут быть повсеместными. Они будут концентрироваться в центрах с высоким инновационным потенциалом, где выше интенсивность потоков и перетоков знаний, в том числе неявных. В России образование в сфере искусственного интеллекта можно получить в 21 регионе, исследования ведутся в 35, а разрабатывают технологию в 40. В статье предложен рейтинг регионального потенциала для создания технологий искусственного интеллекта, оценивающий научно-технологическое развитие и плотность основных элементов региональной инновационной экосистемы в сфере искусственного интеллекта. Рейтинг показывает высокую концентрацию потенциала в крупнейшей агломерации, Москве, и нескольких регионах – креативных ядрах: Московской области, Санкт-Петербурге, Республике Татарстан и Новосибирской области. Выделены 16 креативно-акцепторных центров, способных как создавать, так и внедрять некоторые технологии искусственного интеллекта (Свердловская, Нижегородская, Челябинская, Самарская, Томская, Ростовская области, Краснодарский край и др.), преимущественно акцепторные центры, использующие передовые производственные технологии искусственного интеллекта (23 региона) и 41 регион с минимальным потенциалом. Регионы-лидеры могут получить приоритетное внимание и финансирование. В акцепторных регионах преимущество может быть отдано поддержке автоматизации производств, а в отстающих – повышению восприимчивости населения к цифровым технологиям.
Sistematika buku Bank dan Lembaga Keuangan Lainnya ini mengacu pada pendekatan konsep teoritis dan contoh penerapan. Buku ini terdiri atas 12 bab yang dibahas secara rinci, diantaranya: Sejarah dan perkembangan lembaga keuangan bank dan non bank di Indonesia; Kondisi perbankan dan arsitektur perbankan Indonesia; Bank Indonesia; Otoritas Jasa Keuangan (OJK); Kesehatan bank; Aktivitas perbankan; Kredit perbankan; Bank Umum Syariah; Pasar modal; Pasar uang dan valuta asing; Sewa guna usaha (leasing), modal ventura dan reksadana; dan Asuransi.
Según el Departamento Administrativo Nacional de Estadística (DANE), las micro, pequeñas y medianas empresas (Mipymes) representan el 99,5% del total de empresas en Colombia y generan el 80% del empleo en el sector privado. En los últimos años, el acceso al crédito se ha convertido en un elemento vital para la supervivencia y crecimiento de este grupo, que actualmente tiene una representación significativa en la economía debido a los empleos que proporciona, su importancia estratégica para el desarrollo nacional y su tendencia de crecimiento. Basado en estas premisas, el estudio se centra en analizar el acceso al crédito por parte de las Mipymes en el subsector hotelero y de alojamiento, teniendo en cuenta el impacto de la financiación otorgada por las instituciones financieras a este segmento de empresas, principalmente aquellas que forman parte del ecosistema emprendedor en la ciudad de Ibagué. Del mismo modo, se confrontó el nivel de satisfacción creado por el subsistema financiero y otras fuentes que otorgan crédito, así como las áreas beneficiadas por dicha financiación. Se encontró que el grado de impacto generado por el crédito en las micro y pequeñas empresas es del 70%, lo que genera un efecto en el aumento de las ventas en un 64% y en el aumento de clientes en un 51%. Se recomienda generar una mayor confianza entre el subsistema financiero y los emprendedores, manejar tasas de interés favorables e implementar políticas integrales para apoyar el emprendimiento.
We examine how status dynamics in heterogeneous evaluator groups affect the evaluation of a target venture where some evaluators resemble the venture team while some do not. Using data from a funding competition in China, we theorize and empirically show that the emergence of a status hierarchy among evaluator group members based on top‐university affiliation leads non‐top‐university members to favor top‐university venture teams by 1) increasing the visibility and positive value of top‐university affiliation as a quality signal and 2) suppressing challenging questions directed at top‐university teams. By introducing small group status dynamics as an explanation for similarity bias in venture evaluation, we contribute to the literature on resource mobilization in early‐stage entrepreneurship. Despite the wide use of heterogeneous teams in venture evaluation, similarity bias—a preference for venture teams that resemble the members of an evaluation group—is still prevalent. This study shows that, under certain conditions, heterogeneous evaluation teams might not be a solution for similarity bias. We identify a group‐level source of similarity bias—the emergence of a status hierarchy among evaluators based on affiliation with top universities—which makes top‐university affiliation a more salient and positive quality signal in venture evaluation, particularly for evaluators who are not affiliated with top universities.
The development of venture-capital markets represents an important economic-policy objective and has been pushed in particular by instruments of EU-wide policies, such as the “Juncker Plan” and investment of the European Investment Fund
In the first part of the paper, effects of venture capital and private equity on various economic outcomes, such as employment, investment and economic growth, are examined. Here, the focus is on the added value for the economy generated by venture capital in the form of higher employment, value creation or innovation activity. Venture capital is both micro- and macroeconomically an important development factor for an economy, which is associated with higher innovation, productivity and further positive outcomes
In the second part, we analyze which location factors are decisive for the establishment of venture capital and private-equity funds, as well as which factors increase demand for VC/PE and, in equilibrium, lead to the development of VC and PE markets. It turns out that the availability of venture capital and private equity depends on a number of location factors. Both the supply and demand sides are relevant. Fiscal policies (such as corporate taxation and taxes on carried interest), and legal and cultural elements are essential. The work contributes to a better understanding of success factors of an economy and allows to derive comprehensive economic-policy recommendations to make locations more attractive for venture capital and private equity.
This Corona Virus has spread throughout the World. Besides having a very negative effect on the world of health, this virus is starting to exert its influence on the economic consequences caused by this pandemic. This has resulted in companies struggling to cope with the impact of this pandemic. Due to this pandemic, there are that ultimately threaten or disrupt the business processes of companies in the world, especially in the supply chain process. The impact of this pandemic in the long term can disrupt the process of Supply, Demand and infrastructure. this research would like to see In Food and Beverage Industry have been affected by the conditions of this Covid-19 pandemic. The researcher use miscellaneous tools to check if there has been a change or a hit to the industry due to this pandemic, the researcher use ROA, DER and Total Asset to assess the performance of the sample companies in the industry.
ABTRACT: We examine whether and how venture capital institutions (VC) affect the financialization of non-financial enterprises using China's A-share non-financial listed firms from 2007-2019. We find that VCs' presence reduces the level of enterprises financialization. The negative association is more pronounced in VC with private ownership, invested companies with poor governance and industries with high growth. Further evidence shows that the negative relationship between VC and enterprise financialization is driven by VC with stronger corporate governance engagement, indicating a monitoring channel. We also find that VC exhibits high level of failure tolerance and innovation promotion by decreasing the sensitivity of CEO turnover to compensation-performance and promoting R&D investment in enterprise with stronger arbitrage incentive, suggesting another "crowd-out" channel of innovation promotion. ABTRACT: We examine whether and how venture capital institutions (VC) affect the financialization of non-financial enterprises using China's A-share non-financial listed firms from 2007-2019. We find that VCs' presence reduces the level of enterprises financialization. The negative association is more pronounced in VC with private ownership, invested companies with poor governance and industries with high growth. Further evidence shows that the negative relationship between VC and enterprise financialization is driven by VC with stronger corporate governance engagement, indicating a monitoring channel. We also find that VC exhibits high level of failure tolerance and innovation promotion by decreasing the sensitivity of CEO turnover to compensation-performance and promoting R&D investment in enterprise with stronger arbitrage incentive, suggesting another "crowd-out" channel of innovation promotion.
Agency theory, the predominant theoretical lens employed to examine leveraged buyouts, focuses on buyouts principally as a governance and control device. This view is especially useful in evaluating mature firms where discipline, incentives and limits to managerial discretion serve to mitigate the destruction or the downside of firm value. In contrast, an entrepreneurial view of buyouts is introduced, which incorporates upside incentives for growth and improvements not associated with pure efficiency gains or more effective monitoring to curtail opportunism. Investors such as venture capitalists in the UK and LBO associations in the US are increasingly investing in buyouts to realize entrepreneurial opportunities. Understanding how entrepreneurs make decisions with greater reliance on cognitive biases and heuristics provides an insightful lens for understanding why different types of buyouts occur. These perspectives provide a view of buyouts as a vehicle for strategic innovation and renewal that fosters upside growth opportunities in a variety of buyout types which heretofore have not been incorporated into buyout theory. Finally, research issues are discussed to facilitate future conceptual development and empirical testing of the upside as well as the downside of buyouts.
This paper focuses on the question of how relational rents can be created in the venture capitalist-entrepreneur dyad. It identifies how theoretical frameworks, such as agency theory and procedural justice theory, have been used to describe the relationship between venture capitalists and entrepreneurs. Further, it shows how other research streams, such as organizational learning theory and social exchange theory, may be integrated with research on venture capital financing. The central thesis of the paper is that relational rents can be created in venture capitalist-entrepreneur dyads through relation-specific investments and knowledgesharing routines, based on an effective governance of the relationship between both parties.
RICAFE Working Paper, n° 001/2004
Compares the relative importance of syndicationmotives across different types of venture capitalists. First, a discussion ofmotives for syndicating venture capital (VC) investments leads to theformulation of several hypotheses, two of which propose that the finance motiveis more important for small, early-stage VC firms than for large, later-stagefirms. Other hypotheses suggest that the deal flow motive is more important forlarge, specialized firms than for small, non-specialized firms. The remaininghypotheses involve the deal selection motive and the value-adding motive. Allof the hypotheses are evaluated in light of data on the VC syndicationpractices of 317 VC firms in Sweden, France, Germany, the Netherlands, Belgium,and the United Kingdom. The data suggest that the finance motive is the most important syndicationmotive for both early- and later-stage VC firms. Value adding, on the otherhand, is not an important motive for any firm. Finally, the deal flow and dealselection motives are more important for larger, early-stage VC firms than forsmaller firms. The study concludes with a discussion of implications forresearchers and practitioners. (SAA)
Examines the relationship between venture capitalistinvolvement in portfolio firms and venture capital (VC) firm performance. Areview of relevant literature is followed by a series of hypotheses, the firstof which proposes that there is a curvilinear relationship between VC firms'attention to the investments (i.e., portfolio companies per partner) and theperformance of the VC partnership. It is also hypothesized that syndication frequency positively moderates thisrelationship and that the positive effect of syndication is lower for leadinvestors in syndicates than for non-lead investors. Data on 94 U.S.-based VCfirms and their investments are used to test the hypotheses. Covering theperiod between 1986 and 1998, the data support the hypotheses and suggest thatventure capitalists' attention is valuable to portfolio companies. The resultsalso suggest that there exists an optimal portfolio size with respect to thenumber of companies per partner. (SAA)
While considerable research has sought to understand financial and network foundations of entrepreneurial activity in places such as Silicon Valley and Boston, much has emphasized the urban ecology of talent and expertise. By contrast, this paper focuses upon the financing of clusters of innovation. In this respect, it is a contribution to the emerging synthesis of finance and economic geography initiated by Clark and Freeman, just as it is a contribution to understanding the distinctive attributes of American and British entrepreneurial communities. This paper considers the repercussions of information asymmetries in inherently high-risk and high-uncertainty knowledge markets supported by venture capitalists and other innovation investors. We find seven factors for consideration by decision-makers, public and private. In recent years venture capital research has proliferated within and across a multitude of disciplines; however, if inquiries remain undersocialized (and therefore unreflective of the reality of market decisions), their relevance for competitiveness initiatives will be limited if not misguided.
Examining an increasingly prevalent but under-researched phenomenon, cross-border venture capital investments, it is observed that local venture capitalists typically invest first, followed by foreign venture capitalists in later rounds. A model is developed that explains the role of a domestic venture capital investor in attracting foreign investors and which also accounts for the impact of various circumstances on the importance of this role. In our model based on analysis of nine cross-border venture capital-backed companies, local venture capitalists have several important roles in increasing the venture's cross-border investment readiness including advice to operational management and contributing contacts and local market knowledge. The importance of these roles is mitigated if the entrepreneurial team is highly experienced or if the home market is not important for the venture. The prominence of the local investor has signalling value. Finally, the local investor's international social capital facilitates the formation of cross-border syndicates. Overall, the model developed in the paper contributes to a better understanding of cross-border venture capital and in particular to the division of labour between domestic and foreign venture capitalists in international venture capital syndicates. The paper also contributes to the emerging literature on international social capital.
The differences between the information used for the pre-investment valuation and the valuation methods used by venture capital investors in five countries (USA, UK, France, Belgium and Holland) are empirically studied. The analysis is based on postal questionnaire surveys of representative samples of senior venture capitalists in each country. Differences are found, which may be attributed to the dominant corporate governance mechanism or the level of development of the venture capital market. Between-country differences persist even after taking into account between-country differences in the relative importance of investment stages and venture capital types. Apparently similar systems and venture capital markets place varying emphases on different valuation methods, with theoretically ‘correct’ methods not always being preferred in practice. The findings of the study highlight the need for venture capital firms entering non-domestic markets to invest considerable effort in understanding the operation of these markets if they are to exploit fully their perceived competitive advantages and minimize the likelihood of repeating the problems experienced by venture capital entrants into foreign markets in the late 1980s.
The venture capital (VC) industry started in the United States and then spread worldwide. As it spread into other countries, there was a conscious attempt to copy industry practice from the U.S. However, venture capitalists in other countries are subject to different institutional forces that can impact their behavior. This article uses an institutional perspective to develop testable propositions on the impact of various institutions on venture capitalists’ behavior. The article concludes with a discussion of the implications of an institutional theory perspective for VC research and public policy.
Whereas initially physical capital and later, knowledge capital were viewed as crucial for growth, more recently a very different factor, entrepreneurship capital, has emerged as a driving force of economic growth. In this paper, we define a region's capacity to create new firms start-ups as the region's entrepreneurship capital. We then investigate the local embeddedness of this variable and which variables have an impact on this variable. Using data for Germany, we find that knowledge-based entrepreneurship capital is driven by local levels of knowledge creation and the acceptance of new ideas, indicating that local knowledge flows play an important role. Low-tech entrepreneurship capital is rather increased by regional unemployment and driven by direct incentives such as subsidies. All three measures are locally clustered, indicating that indeed, entrepreneurship capital is a phenomenon that is driven by local culture, and is therefore locally bounded.
This paper identifies a strong tendency for Canadian private equity investors to finance entrepreneurs that reside in the
same province. For all types of investors and entrepreneurial firms, in terms of the number of investments (13,729 transactions),
84.42% of investments were intra-provincial. In terms of the total value of these transactions ($20,193,896,909 in 1997 dollars),
61.15% of the investment value was intra-provincial. We provide evidence that both agency costs and information asymmetries
systematically give rise to differences in the frequency of inter- versus intra-provincial investments, and compare the importance
of agency versus institutional factors leading to home bias.
We examine the antecedents of international and domestic learning effort in independent firms. We combine learning theory and the “attention-based” view to examine how firms' degree of internationalization, the age at international entry, and entrepreneurial orientation are associated with the extent to which they engage in foreign and domestic learning activities. In particular, our study shows that early entry in foreign markets and an entrepreneurial orientation are positively related to a culture that promotes learning effort in international and domestic markets. On the other hand, whereas a firm's degree of internationalization does not have a significant association with international learning effort, the degree of internationalization is negatively related to domestic learning effort. We discuss the implications of our study for theory, practice, and future research.
In this paper, we seek to explain venture capitalists' reactions to disappointments caused by entrepreneurs. Our basic assumption is that venture capitalists' social environment, defined as exposure to venture capital and business communities, will influence their responses to problematic situations. The results of our study suggest that venture capitalists with strong ties to their colleagues and with managerial experience are more inclined to use active and constructive approaches than venture capitalists with a lesser exposure to the venture capital and business communities.
Using two complementary theoretical perspectives, we develop hypotheses regarding the determinants of the return required by venture capitalists and test them on a sample of over 200 venture capital companies (VCCs) located in five countries. Consistent with resource-based theory, we find that early-stage specialists require a significantly higher return than other VCCs when investing in later-stage ventures. Consistent with financial theory, we find that acquisition/buyout specialists require a significantly lower return than other VCCs when investing in expansion companies. Furthermore, in comparison to specialists, highly stage-diversified VCCs require a significantly higher return for early-stage investments. Independent VCCs require a higher rate of return than captive or public VCCs. In general, higher required returns are associated with VCCs who provide more intensity of involvement, have shorter expected holding period of the investment, and being located in the US or UK (in comparison to those in France, Belgium, and The Netherlands).
We consider the provision of venture capital in a dynamic agency model. The value of the venture project is initially uncertain and more information arrives by developing the project. The allocation of the funds and the learning process are subject to moral hazard. The optimal contract is a time-varying share contract which provides intertemporal risk-sharing between venture capitalist and entrepreneur. The share of the entrepreneur reflects the value of a real option. The option itself is based on the control of the funds. The dynamic agency costs may be high and lead to an inefficient early stopping of the project. A positive liquidation value explains the adoption of strip financing or convertible securities. Finally, relationship financing, including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting.
This paper analyzes the relationship between public and private sources of venture capital in Europe and the development of the industry, controlling for characteristics of the legal systems, in 15 European countries over the period 1990–1996. Large public participation is correlated with smaller VC industries, but analyses do not support the view that public venture capitalists are acting to seed the industry or that are they crowd-out private funds. On the contrary, public involvement seems to cause greater amounts of money to be invested in the industry as a whole. We argue that the effects of public intervention, whatever the motives, are real and probably result from demonstrating/sanctioning the social merit of venture capital and from signaling an enduring commitment to it.
Previous research has indicated that investment in R&D by private firms and universities can lead to knowledge spillover, which can lead to exploitation from other third-party firms. If the ability of these third-party firms to acquire knowledge spillovers is influenced by their proximity to the knowledge source, then geographic clustering should be observable, especially in industries where access to knowledge spillovers is vital. The spatial distribution of innovation activity and the geographic concentration of production are examined, using three sources of economic knowledge: industry R&D, skilled labor, and the size of the pool of basic science for a specific industry. Results show that the propensity for innovative activity to cluster spatially is more attributable to the influence of knowledge spillovers and not merely the geographic concentration of production. (SFL)
This study empirically evaluates the certification and value-added roles of reputable venture capitalists (VCs). Using a novel sample of entrepreneurial start-ups with multiple financing offers, I analyze financing offers made by competing VCs at the first professional round of start-up funding, holding characteristics of the start-up fixed. Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10-14% discount. The evidence suggests that VCs' ''extra-financial" value may be more distinctive than their functionally equivalent financial capital. These extra-financial services can have financial consequences.
This article examines the economics of financing small business in private equity and debt markets. Firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle. We show the sources of small business finance, and how capital structure varies with firm size and age. The interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment. We also analyze a number of research and policy issues, review the literature, and suggest topics for future research.
A widespread assumption is that U.S. venture capitalists source their best investments locally, so out-of-state venture funds are at a disadvantage in relation to local competitors. This assumption drives most venture funds to focus their investments on local companies. The study reported here tested this hypothesis by analyzing IPO rates by the state of venture-funded companies for the past 25 years. Locally funded companies actually achieved a lower average IPO rate than that of nationally funded companies. Therefore, venture funds should seek to capitalize on any local advantage but should also seek to balance their investments by diversifying geographically.
This paper uses UK survey data to investigate the different motives that venture capital firms have for syndicating equity investments, partner selection, and the link between competition and syndication in the market. The traditional finance perspective views syndication as a response to the need to diversify away risk, whereas the resource-based theory views syndication as a means of accessing a competitor's firm-specific resources. The results of the study indicate that syndication is more a response to the need to spread risk than share information and manage investments. Also, when the sample was subdivided according to minimum investment preference the resource-based perspective was found to be even less important for those firms who only invested sums of 5 million and greater. This result also held for the finance theory perspective for syndicating deals. The above findings were mirrored in the results relating to partner selection as the financial characteristics and resource-base of the firm were not found to be important factors in selecting a syndicate partner. Rather, partner selection was found to be far more influenced by a past interaction, reputation and investment style. Finally, evidence was found to suggest that competition in the venture capital market exerts a negative influence over a firm's decision to syndicate out a deal; however, this influence is significantly less for the decision to syndicate in to a deal.
By comparing the network structure of venture capital (VC) firms in Silicon Valley (California) to that of VC firms in Route 128 (Massachusetts), the present study challenges any market-centred theory of regional development. I show that there are advantages in examining the structure of social networks of cooperation within the venture capital industry to understand the level of development of a region. I support two distinctive propositions regarding the regional advantage of Silicon Valley over other US high-technology regions such as Route 128. First, collaboration among VC firms in Silicon Valley is more pronounced and dense than in Route 128. Second, the number of investments and amount of money invested by VCs in Silicon Valley staying local are much higher than the number of investments and moneys invested locally by Route 128 VC firms. I argue that historical development as well as the particular structure of the social networks in Silicon Valley is precisely what has fostered relatively higher growth and development of the region compared to many other regions of the world. interests are formal organisations, economic sociology and comparative sociology. His most recent book examines advanced quantitative methodologies for the analysis of longitudinal data in the social sciences. An active researcher and teacher, he received the Cilker Teaching Award in 1999 and the Stanford Centennial Teaching Award in 1998. Currently, he is studying the influence of social networks on intra-organisational career paths and employee performance. He is also involved in a historical analysis of social networks among different companies and institutions in Silicon Valley.
Three principal aspects of venture capital (VC) are empirically explored: fundraising, investing, and exiting those investments. Despite the recent attention to VC, misconceptions abound that the authors attempt to correct. Throughout, the discussions are based on examinations of a large sample of firms, VC funds, and investments. Three themes are elaborated in the volume: (1) The great incentive and information problems venture capitalists must overcome; (2) the interrelatedness of each aspect of the VC process and how it proceeds through cycles; and that (3) the VC industry adjusts slowly to shifts in the supply of capital or the demand for financing. The VC partnership is the intermediary between investors and high-tech start-ups. The fundraising aspect is examined in terms of its structure, means of compensation, and the importance of the structure of the limited partnership form used by most VC funds. The need to provide incentives and shifts in relative negotiating power impact the terms of VC limited partnerships. Covenants and compensation align the incentives of VC funds with those of investors; covenants and restrictions limit conflicts among investors and venture capitalists. Supply and demand and costs of contracting determine contractual provisions. VC contracting may not always be efficient. During periods of high demand and capital flows, partners negotiate compensation premiums. The investing aspect is discussed in terms of why investments are staged, how VC firms oversee firms, and why VC firms syndicate investments. Four factors limit access to capital for firms: uncertainty, asymmetric information, nature of firm assets, and conditions in the financial and product markets. These factors determine a firm's financing choices. Asymmetries may persist longer in high-tech firms, thus increasing the value of delaying investment decisions. Exiting VC investments is examined, in regard to the market conditions that affect the decision to go public, whether reputation affects the decision to go public, why venture capitalists distribute shares, the performance of VC-backed firms, and the future of the VC cycle. Exiting investments affects every aspect of the investment cycle. Venture capitalists add value to the firms in which they invest. The VC cycle is a solution to information and inventive problems. (TNM)
This paper examines whether a truly global market for venture capital and private equity is emerging or whether the current situation of segmented national markets is likely to endure. We document very rapid growth in venture capital fund raising and investment over the past decade in the United States, Western Europe and in certain Asian countries, but not in Japan or in most developing countries. We compare contracting practices, investment patterns and returns between the U.S. and Europe, and find that there has been considerable convergence between these two large VC markets, particularly during the past five years. This convergence is likely to continue. Nonetheless, we conclude that the major national markets will remain effectively segmented and suggest that venture capital will continue to be much more important in common law countries than in civil law countries for the foreseeable future.
This article proposes that the attention allocated by venture capitalists to portfolio companies impacts their performance. The article develops arguments for optimal portfolio size and for the moderating roles of syndication frequency and role. The hypotheses receive support from analyses employing longitudinal data of the leading U.S. venture capital firms. Our results indicate the value of venture capitalist involvement and give guidance for its optimal allocation and syndication.
A largely neglected question in the literature on private equity investing is how the competitive environment influences the activities of private equity firms. In this study, we examine the impact of market concentration and interfirm networking through syndication on the price private equity firms pay to acquire investment targets. As such, we provide insights on the sources of returns in the private equity market. We test our hypotheses by studying the price private equity firms pay to acquire buyout targets using a unique hand-collected dataset of UK buyout transactions in the period 1993 to 2002. Our results show that lower levels of market concentration in the market for private equity increase the price private equity investors pay to acquire target firms. Our results did not indicate a consistent effect from the extent of interfirm networking through syndication. Implications for theory and practice are suggested.
We explore the potential for abuse of startup founders and other common stock shareholders by venture capitalists. We first analyze a set of 26 lawsuits involving venture capitalists and entrepreneurs. Our analysis of lawsuits reveals that VC-related litigation is almost always initiated by founders, and most common allegations are dilution and freezeout of founders, followed by expropriation of company assets via related-party transactions. We document that most of the lawsuits that were not promptly settled end up dismissed by judges on procedural grounds, and yet, after winning, the involved VCs have raised significantly less capital than their peers and have syndicated deals with less reputable partners. We next analyze the founder ownership at the going-public stage in a sample of 390 VC-backed IPOs. We find that founders are less likely to be involved in firm governance and have lower ownership in startups backed by less reputable VCs and where VC investment rounds have been insider dominated. The results suggest that the potential for expropriation of equity holders in venture-backed startups has important implications for entrepreneurial activity.
Sociological investigations of economic exchange pay particular attention to the manner in which institutions and social structures shape transactions among economic actors. Extending this line of inquiry, we explore how interfirm networks in the US venture capital (VC) market from 1986 to 1998 affect the spatial patterns of exchange. We present evidence suggesting that geographic and industry spaces represent natural boundaries that contain the transmission of information about potential investment opportunities. In turn, the highly circumscribed flow of information within these spaces contributes to the geographic- and industry-localization of venture capital investments. After establishing this finding, the majority of our empirical analyses document that the social networks in the venture capital community ? built up through the industry's extensive use of syndicated investing ? facilitate the diffusion of information across geographic and industry boundaries and therefore expand the spatial radius of exchange. We show that VCs that build axial positions in the industry's co-investment network can obtain information from distant sources and hence expand the scope of their investments over time. Consistent with the sociologist's general view of markets, variation across actors in their positioning within the structure of a market appears to differentiate market participants in their ability to overcome boundaries that otherwise would curtail exchange.
Syndicates are a form of inter-firm alliance in which two or more venture capital firms co-invest in an investee firm and share a joint pay-off. Syndication is a significant part of the venture capital market yet little research has been conducted into the process of structuring syndicate deals and the management of syndicates following deal completion. This paper analyses the neglected issues concerning the structuring and management of syndicated venture capital investments from the perspectives of both lead and non-lead syndicate members using two surveys of venture capital firms and examination of syndication documents. Lead investors typically have larger equity stakes and the syndicated investment agreement is a document that enshrines the rights of participants rather than specifying behaviour. Contractual arrangements typically serve as a back drop to relationships as non-legal sanctions are important and decisions are typically reached following discussion and consensus, but lead venture capital investors' residual and specific powers are important in ensuring timely decision-making. The findings extend previous work on alliances by emphasizing the importance of non-legal sanctions, especially reputation effects, in mitigating opportunistic behaviour by dominant equity holders. The paper also adds to the limited research on the dynamics of alliances by highlighting the role of repeat syndicates. Copyright 2003 Blackwell Publishing Ltd..
"Managing the different companies in which they invest while at the same time performing portfolio optimization for themselves, venture capitalists position themselves as a pure-play or diversified conglomerate through their cumulative portfolios. I examine the effects of two investment strategies of venture capitalists:" 1) "a specialist "pure-play" strategy that maximizes venture capital involvement and" 2) "a more generalist strategy of diversification at the "firm" level that minimizes portfolio risk. I find that neither strategy optimizes both venture capital growth and time to entrepreneurial exit, which highlights a need for institutional investors to clarify fund objectives at the time a fund is established." Copyright (c) 2009 Financial Management Association International.
Venture capitalists functioning as lead investors and the entrepreneur-CEOs of their portfolio companies responded to questionnaire surveys that asked them to rate the venture capitalists' involvement in the ventures. The perceived effectiveness of the investor's involvement weighted by its perceived importance was used as a proxy for the investor's value to the venture. The survey was administered in the early part of 1988. Eighty percent of venture capitalists and 85% of entrepreneurs surveyed responded; in all, 51 matched pairs of lead investor-CEO surveys were completed and returned. Over 50 hours of interviews were also conducted to help clarify information derived through the surveys.
In this paper, we compare two alternative financing strategies that capital-constrained entrepreneurs can adopt: they can either wait until they raised enough money to complete their project (the more conservative strategy) or use limited resources to achieve some intermediate milestone before contacting large outside investors such as venture capitalists (the more adventurous strategy). We examine how the choice of financing strategy is affected by entrepreneurial types (life-style, serial and pure profit-maximizing entrepreneur). We show that specific entrepreneurial characteristics may ultimately affect the shape of firms as they may pursue different strategies to achieve similar goals. The paper generates a number of empirical predictions on security design, the interplay between angel and venture capital finance, and the professionalization of the venture capital market.
We analyze the impact of venture capital finance on growth and innovation of young German firms. On the basis of statistical matching procedures we confirm findings that venture-funded firms have a higher number of patent applications than those in the control group. However, these are obtained even before the venture capitalists' investment, hence venture capitalists choose firms with demonstrated innovative output. After investment, the number of firms' patents does not differ significantly anymore, however their growth rates are significantly larger. This suggests that the higher innovativeness of venture-funded firms is due to the selection process of the venture capitalist prior to the funding rather than to the venture funding itself. Venture capitalists seem to focus rather on commercialization of existing innovations and growth of the firm.
Over the past decade, billions of dollars have been invested by established companies in entrepreneurial ventures—what is often referred to as corporate venture capital. Yet, there is little systematic evidence that corporate venture capital investment creates value to investing firms. Scholars have suggested that established firms face underlying challenges when investing corporate venture capital. Namely, structural deficiencies inherent in corporate venture capital may inhibit financial gains. However, firm value may still be created as a result of other benefits from investing—primarily providing a window onto novel technology. In this paper, we propose that corporate venture capital investment will create greater firm value when firms explicitly pursue corporate venture capital to harness novel technology. Using a panel of CVC investments, we present evidence consistent with our proposition. The findings are robust to various specifications and remain unchanged even after controlling for unobserved heterogeneity in investing firms. Our results have important implications for corporate venture capital in particular, and technology strategy in general.
Venture capitalists (VCs) not only finance but also add value to start-up companies. Advising firms is time consuming and creates a trade-off between intensity of advice and portfolio size. We jointly determine the optimal number of portfolio companies and the intensity of managerial advice. Diminishing returns to advice per firm call for a larger portfolio. With progressively increasing managerial effort cost, however, a larger number crowds out advice to each individual firm. As they receive less support, entrepreneurs request a larger profit share, making further portfolio expansion eventually unprofitable. Comparative static analysis shows how optimal portfolio size responds to venture returns and other parameters.
It is well documented that the venture capital industry is highly volatile and that much of this volatility is associated with shifting valuations and activity in public equity markets. This paper examines how changes in public market signals affected venture capital investing between 1975 and 1998. We find that venture capitalists with the most industry experience increase their investments the most when public market signals become more favorable. Their reaction to an increase is greater than the reaction of venture capital organizations with relatively little industry experience and those with considerable experience but in other industries. The increase in investment rates does not affect the success of these transactions adversely to a significant extent. These findings are consistent with the view that venture capitalists rationally respond to attractive investment opportunities signaled by public market shifts.
Venture capitalists, representing informed capital, screen, monitor and advise start-up entrepreneurs. The paper reports three new results on venture capital (VC) finance and the evolution of the VC industry. First, there is an optimal VC portfolio size with a trade-off between the number of companies and the value of managerial advice. Second, advice tends to be diluted when the industry expands and VC skills remain scarce in the short-run. The delayed entry of experienced VCs eventually restores the quality of advice and leads to more focused company portfolios. Third, as a welfare result, VCs tend to provide too little advisory effort and to invest in too few companies. Testable implications are also discussed.
This paper extends recent research studying biases in venture capitalist's decision making. We contribute to this literature by analyzing biases arising from similarities between a venture capitalist and members of a venture team. We summarize the psychological foundations of such similarity effects and derive a set of hypotheses regarding the impact of similarity on the assessment of team quality. Using data from a conjoint experiment with 51 respondents, we find that venture capitalists tend to favor teams that are similar to themselves in type of training and professional experience. Our results have important implications for academics and practitioners alike.
We show that inflows of capital into venture funds increase the valuation of these funds’ new investments. This effect is robust to (i) controlling for firm characteristics and public market valuations, (ii) examining first differences, and (iii) using inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with competition for a limited number of attractive investments being responsible for rising prices.
In this paper, we examine a Canadian tax-driven venture capital vehicle known as the “Labour Sponsored Venture Capital Corporation” (LSVCC). As a theoretical matter, we suggest that the LSVCCs can be expected to have higher agency costs and lower profitability than private venture capital funds. We present data that is consistent with this view. The central question that we analyze, however, is whether the tax advantages conferred on LSVCCs have resulted in LSVCCs “crowding out,” or displacing other types of venture capital funds. Empirical analysis of our data (which covers the 1977–2001 period) is highly consistent with crowding out. The data suggest that crowding out has been sufficiently energetic as to lead to a reduction in the aggregate pool of venture capital in Canada, frustrating one of the key governmental goals underlying the LSVCC programs; namely, the expansion of the aggregate pool of capital. In the course of our analysis, we confirm the importance of macroeconomic factors (the performance of the stock market, real interest rates, and changes in real gross domestic product) in affecting the supply of and demand for venture capital. We also generate evidence that is consistent with the proposition that entrepreneurs in the market for venture capital prefer to incorporate their businesses federally, rather than provincially.
What does it take for a region to foster technological entrepreneurship? Recently, there has been significant interest in this topic. Most writers on this topic emphasize the tangible infrastructure such as sound legal systems, transparent capital markets, advanced telecommunications and transportation systems, etc. Sound legal systems, capital markets, and other structural features are necessary prerequisites for technopreneurship; however, what I am calling the intangibles of entrepreneurship are the sufficient conditions that allow, specifically, for Schumpeterian entrepreneurship to thrive in a locality. Often, governments attempt to promote technopreneurship by injecting risk capital. They distribute these funds through small business development centers, and several regions and countries have even attempted “public” venture capital funds. However, my hypothesis is that if only risk capital is injected, it flows straight to low-quality entrepreneurship. Focusing on only risk capital, the investing government assumes that the risk capital itself will create all other prerequisites for growth. This is a major supposition. If risk capital is expected to produce extraordinary wealth, it must be accompanied by seven other intangibles, including, access to novel ideas, role models, informal forums, region-specific opportunities, safety nets, access to large markets, and executive leadership.
This paper examines the dynamics of exit options for US venture capital funds. Using a sample of more than 20,000 investment rounds, we analyze the time to ‘IPO’, ‘trade sale’ and ‘liquidation’ for 6000 VC-backed firms. We model these exit times using competing risks models, which allow for a joint analysis of exit type and exit timing. The hazard rate for IPOs are clearly non-monotonic with respect to time. As time flows, VC-backed firms first exhibit an increased likelihood of exiting to an IPO. However, after having reached a plateau, non-exited investments have fewer possibilities of IPO exits as time increases. This sharply contrasts with trade sale exits, where the hazard rate is less time-varying. We further provide evidence on the impact of economic factors such as syndicate size and composition, geographical location and VC value adding, on exit outcomes.