Article
To read the full-text of this research, you can request a copy directly from the authors.

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.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... 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). ...
Article
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.
... The entrepreneurship literature has emphasized the role of geographic distance in venture capital (VC) firms' investment relationship with startups (Stuart and Sorenson, 2003;Guler and Guillén, 2010a). Despite the challenges imposed by geographic distance, such as uncertainty and information asymmetry (Gupta and Sapienza, 1992;Cumming and Dai, 2010), VCs are increasingly reaching far across geographic boundaries to seek partnership opportunities and improve investment prospects (Sorenson and Stuart, 2008;Jääskeläinen and Maula, 2014). ...
... A growing body of literature highlights the critical role of geographic distance between business partners on various innovation and entrepreneurship activities, such as innovation and knowledge appropriation (Rosenkopf and Almeida, 2003;Wang and Zhao, 2018), entrepreneurship ecosystems (Letaifa and Rabeau, 2013), and VC investments (Stuart and Sorenson, 2003;Colombo et al., 2019). Most current studies demonstrate a negative relationship between geographic distance and partnership performance (e.g., Sorenson and Stuart, 2003;Cumming and Dai, 2010). However, there is also empirical evidence of a positive or insignificant impact of geographic distance (e.g., Letaifa and Rabeau, 2013). ...
... The negative impact of geographic distance on startup-VC partnership performance is widely documented (Sorenson and Stuart, 2001;Cumming and Dai, 2010;Dai et al., 2012;Lutz et al., 2013). Despite the geographic challenges, VC firms are increasingly reaching far to pursue new investment opportunities and beat competition (Sorenson and Stuart, 2008;Jääskeläinen and Maula, 2014). ...
Article
Full-text available
Acknowledgments: We are grateful to the constructive comments of Phillip Kim (the Editor) and three anonymous referees. Abstract This study aims to unravel the dynamic effect of geographic distance on startup-VC partnership performance by incorporating the possibility of accessibility improvement triggered by China's high-speed railway (HSR) during the partnership. We find that the negative effect of geographic distance is significantly weakened when HSR becomes available after the startup-VC partnership formation. We draw on the relational view to explore what types of geographically distant startup-VC partners can benefit more from HSR technology advancement. Results indicate that startup-VC partners that rely heavily on knowledge-sharing, have more complementary resources, or have more complex governance structures can better leverage the improved accessibility from HSR to transform the disadvantages of the long-distance to advantages.
... Indeed, one of the pioneers of angel research claimed the likelihood angels invest in firms increases exponentially 'the shorter the distance between the two parties' (Wetzel, 1983, p. 27). Owing to this, angels and other equity investors are often 'dominated by parochialism' and 'local bias' (Cumming and Dai, 2010;Harrison et al., 2010;Shane and Cable, 2002) with a strong preference for investments 'in local firms' (Cumming and Zhang, 2019, p. 693). Close proximity facilitates the transfer of 'soft information' which encompasses assessments of the entrepreneur, the firm and the competitiveness of its products and managerial capabilities (Hall and Lerner, 2010;Kerr et al., 2014). ...
... Close proximity facilitates the transfer of 'soft information' which encompasses assessments of the entrepreneur, the firm and the competitiveness of its products and managerial capabilities (Hall and Lerner, 2010;Kerr et al., 2014). Consequently, there is a widely-held perception that equity investors utilise decision-rules such as the '20 minute rule' (where VCs only invest in companies located within a 20 minute drive from their office) to inform decision-making (Cumming and Dai, 2010). Whereas the veracity of such heuristics is questionable, a substantial body of empirical evidence suggests that the 'information intensive' nature of the investment process means that equity investors have an overwhelming local bias (Cumming and Dai, 2010;Martin et al., 2002Martin et al., , 2005. ...
... Consequently, there is a widely-held perception that equity investors utilise decision-rules such as the '20 minute rule' (where VCs only invest in companies located within a 20 minute drive from their office) to inform decision-making (Cumming and Dai, 2010). Whereas the veracity of such heuristics is questionable, a substantial body of empirical evidence suggests that the 'information intensive' nature of the investment process means that equity investors have an overwhelming local bias (Cumming and Dai, 2010;Martin et al., 2002Martin et al., , 2005. ...
Article
Full-text available
Business angels (BAs) - high net worth individuals who provide informal risk capital to firms - are seen as important providers of entrepreneurial finance. Theory and conventional wisdom suggest that the need for face-to-face interaction will ensure angels will have a strong predilection for local investments. We empirically test this assumption using a large representative survey of UK BAs. Our results show local bias is less common than previously thought with only one quarter of total investments made locally. However, we also show pronounced regional disparities, with investment activity dominated by BAs in London and Southern England. In these locations there is a stronger propensity for localised investment patterns mediated by the “thick” nature of the informal risk capital market. Together these trends further reinforce and exacerbate the disparities evident in the UK’s financial system. The findings make an important contribution to the literature and public policy debates on the uneven nature of financial markets for sources of entrepreneurial finance.
... Because of this, VC institutions may prefer to invest the enterprises that are close to them, making it harder for enterprises with a long geographic distance to obtain their investments (Belderbos et al., 2018). More importantly, geographic proximity can promote the exchange of information between VC institutions and enterprises, and also can reduce the transaction and oversight costs of investment activities (Cumming and Dai, 2010). ...
... Due to the geographic proximity of VC activities, it is necessary to analyze the impact of VC on the technological performance of enterprises from the perspective of geography distance. First, the geographic distance between VC institutions and enterprises is a crucial decision variable for decision-makers (Boschma, 2005;Dushnitsky and Lenox, 2005;Maggioni and Uberti, 2009;Cumming and Dai, 2010). Second, the asymmetric information is more significant as the geographic distance increases (Ivkovic and Weisbenner, 2005;Karlsson, 2010;Chen et al., 2011;Tian, 2011;Kolympiris et al., 2018), since VC institutions are sticky and difficult to change as the distance increases (Grilli et al., 1994). ...
... Geographic distance refers to the spherical distance between VC institutions and enterprises, and it is an essential exogenous variable for the enterprise's technological performance (Cumming and Dai, 2010;Lutz et al., 2013;Guenther et al., 2018). VC institutions tend to exhibit geographic agglomeration (Coccia, 2004;Ivkovic andWeisbenner, 2005, 2008;Chen et al., 2010;Hoenen et al., 2014;Cheng et al., 2019). ...
Article
Venture capital (VC) plays an increasingly important role in advancing the technological innovation of enterprises. A growing body of evidence suggests that VC influences the technological performance of enterprises. No known empirical studies have focused on the relationships between geographic distance and the enterprise's technological performance. This study explores whether and how the geographic distance between VC institutions and enterprises influences the enterprise's technological performance from the perspective of the VC's equity backgrounds (governmental, private, and foreign) and investment strategies (independent and joint). The findings and conclusions are as follows: (1) The geographic distance between VC institutions and enterprises has a significantly nonlinear effect on the technological performance of the VC-backed enterprise, and they are negatively correlated when the geographic distance is less than the specified threshold. (2) The influence of geographic distance on the enterprise's technological performance varies with the VC's equity backgrounds. Geographic distance has a more significant impact on the technological performance of governmental VC- and private VC-backed enterprise compared with foreign VC-backed enterprise. (3) For different investment strategies, geographic distance also has a distinct influence on the enterprise's technological performance. When compared with joint VC, the impact of independent VC on the enterprise's technological performance is more influenced by geographic distance.
... In this study, drawing on the knowledge-based view, we investigate how the different types of VC relate to new venture internationalization. First, we consider different VC types (Bertoni et al., 2013) and examine the different impact of foreign VC and corporate VC on new venture internationalization. Foreign VCs invest from outside the portfolio company's home country (Guler & Guillén, 2010). While many VCs exhibit local bias (Cumming & Dai, 2010), the amount of crossborder investments has been growing (Aizenman & Kendall, 2012;Chemmanur, Hull, & Krishnan, 2016;Guler & Guillén, 2010;Wright, Pruthi, & Lockett, 2005), and the prevalence of foreign VC has been increasing. Foreign VCs possess institutional knowledge about foreign markets that can help the internationalization of portfolio companies (Humphery-Jenner & Suchard, 2013). ...
... Such knowledge, offered to PCs directly and as advice, can help young ventures as they internationalize, as market knowledge, knowledge of internationalization processes, and knowledge of international operations are crucial to market entry (Clark, Pugh, & Mallory, 1997). While many venture capitalists exhibit local bias and prefer to invest in ventures that are nearby (Cumming & Dai, 2010;Cumming & Johan, 2009), the knowledge, experience, and network resources of VC investors may influence the geographic goals of new ventures (Gupta & Sapienza, 1992). Venture capitalists with prior experience in foreign countries may perceive less risk related to internationalization (Carpenter, Pollock, & Leary, 2003) or the need for less knowledge to initiate foreign market entry (Liesch & Knight, 1999). ...
... Generally, VCs prefer to invest in domestic ventures (Cumming & Dai, 2010). However, since home markets are increasingly saturated with investors, VCs need to broaden their geographical scope and focus more on international investment opportunities. ...
Article
This study examines how different types of venture capital relate to new venture internationalization. Using a sample of 646 U.S. new ventures that executed IPOs between 1995 and 2010, we find that ventures with foreign or corporate venture capital have higher levels of international intensity. We also investigate the moderating role of VC reputation on the relationship between foreign venture capital and international intensity and corporate venture capital and international intensity. Our results suggest that VC reputation weakens the positive relationship between corporate VC and international intensity.
... 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. ...
Article
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. ...
... Finally, this study supplements the research on the determinants of VC investment. Studies have shown a negative relationship between geographic distance and VC investment likelihood, while the experiences of VC and syndication networks further extend the spatial reach of VC investments (Sorenson and Stuart 2001;Cumming and Dai 2010). Giroud (2013) and Bernstein et al. (2016) documented that airline routes increase the likelihood and performance of intercity investment. ...
... Similarly, Sorenson and Stuart (2001) showed a negative relationship between geographical distance and VC investment likelihood. Cumming and Dai (2010) revealed that information asymmetries eventually lead to negative performance in VC investment deals; thus, VCs prefer local start-ups. HSR expansion, however, largely reduces the transportation cost of intercity travel and facilitates face-to-face communications, thus directly reducing the cost of information exchange and increasing opportunities for cooperation between VC investors and investees in different cities. ...
Article
Full-text available
Using the data on venture capital investment in China and high-speed railway (HSR) construction as a natural experiment, this study presents empirical evidence about the impact of transportation infrastructure on capital mobility. The study finds that one new HSR train serving a city increases venture capital inflow to and outflow from that city by 1.0% and 1.6%, respectively. The heterogeneous analyses indicate that small cities, high-tech industries, and younger firms are significantly affected by HSR connections, which show that the accelerated information transmission and investors’ incremental growth expectations may account for the observed effect.
... The VX dataset groups ventures into three industries (information technology, medical/health care/life science, and non-high tech) and provides a business description for each venture with relevant keywords, in line with the CB keywords. 9 The adjoining of the two datasets is completed in several steps. First by sorting ventures' financing deals into three (early, main, and late) funding stages, a relatively straightforward process since CB and VX each have a more detailed breakdown of funding stages. ...
... 12 Our findings hold for the CB and VX datasets separately, but their adjoining is advan- (approximately 13.17%) overlap. 13 The focus areas of the two datasets are also noticeable in 9 We focus on ventures in the funding stages that VX classifies as 'Startup/Seed', 'Early Stage', 'Expansion', or 'Later Stage', which excludes 6,104 deals classified under 'Real Estate' or 'Other' funding stages. 10 The two datasets categorize funding stages differently. ...
Article
Full-text available
The General Data Protection Regulation (GDPR) was enacted in the European Union in April 2016 and went into effect in May 2018. We study its impact on investment in new and emerging technology firms. Our findings indicate negative post-GDPR effects after its 2018 rollout on European ventures, relative to their counterparts in the US and the rest of the world, and considerably lesser effects after its 2016 en-actment and before implementation. The negative effects manifest in the number of and amounts raised in financing deals, and are particularly pronounced for newer, data-related, and business-to-consumer ventures.
... This means that neoclassical approaches that assume rational behaviour of perfectly informed agents and equal capital cost across space are questionable (Pollard 2003;Klagge and Martin 2005). Such imperfections when coupled with the geographical constitution of financial markets, typically mean a concentration of equity deals in core regions with a richer supply side of investors (Mason and Harrison 2002;Cumming and Dai 2010) and associated well developed, informed and structured demand from firms. Fund managers in a city are more likely to invest if other investors hold equities in the area, as geographical proximity between investors facilitates information flow among them (Hong, Kubik, and Stein 2005). ...
... example, larger regions with agglomerations are expected to increase the number of investors, and high-growth companies (see Mackinnon and Cumbers 2019) which might be targeted by equity funds. Moreover, capital market imperfections, when combined with the geographical constitution of financial markets, could lead to more equity deals in core regions with a richer supply side of investors(Mason and Harrison 2002;Cumming and Dai 2010) and associated well developed, informed and structured demand from firms. In light of this, regions ...
Article
Full-text available
Previous research has examined geographical variations in SME access to external finance, especially bank loans. Rather less attention has been paid to how far SME equity access difficulties in more peripheral regions, and cities within these regions, is a demand or supply side issue, and how far equity investments are concentrated in specific urban areas in peripheral regions. This paper examines these topics through an analysis of small firm equity deals across the UK regions, before focusing on the case of the Welsh economy. In the case analysis a low equilibrium for small business equity investment in Wales is identified, with low demand and poor supply of equity, but with a relatively high concentration of equity deals in the Cardiff urban area. The paper examines the potential implications of a low equity equilibrium and provides a challenge for further research in the area.
... Table 1 shows some descriptive statistics of the sample. Truncating the sample so that 2010 is the end date for investments allows investments to have at least five years to "perform," as venture performance data were collected in 2015 (Cumming and Dai 2010;Hochberg et al. 2007). ...
... We deemed countries with fewer than ten IVC investments to have too few investments to allow for proper assessment of performance and reasonable cross-country comparisons. Performance data were taken through the year 2015 in order to give the investee ventures at least five years to exhibit the performance outcome (Cumming and Dai 2010;Hochberg et al. 2007). For full information on the source and composition of each measure, see Table 1. ...
Article
Full-text available
Prior research suggests that market-supporting institutions are attractive to international venture capital (IVC), yet paradoxically VC firms increasingly invest in countries characterized by institutional weaknesses. In this study, we explore the institutional contexts that make countries attractive to IVC investment and favorable to IVC performance, thus illuminating the implied risk-reward tradeoffs in IVC firm location choice and ability to navigate institutional weaknesses. Utilizing fuzzy-set Qualitative Comparative Analysis (fsQCA), we find four distinct configurations of institutions associated with IVC attractiveness. Each configuration allows for some institutional weaknesses, enabling us to elaborate theory on institutional complementarities and substitutions that drive IVC investment. Further, we find that IVC firms have performed well even in countries with pervasive institutional weaknesses, suggesting that IVC firms may uniquely contribute to the success of new ventures in such institutional contexts. We discuss implications for theory and offer policy and managerial recommendations particularly relevant to IVC activity in the Asia-Pacific region.
... Shane and Cable (2002) suggest that entrepreneurs rely on social capital so as to connect with VC investors, and the distant between VCs and companies seeking investment tend to influence the premium given that distance is often associated with uncertainties and makes the VCs face greater information asymmetries (Carpentier and Suret, 2006). Proximity between VCs and backed companies allows for more frequent meetings between both sides and it as well helps for better coaching to boost VCs expected benefit whilst monitoring to reduce expected agency cost (Cumming and Dai, 2010). The negative effects of geographical distance between VCs and backed companies are reduced but not completely eliminated despite the advancement in transportation system which have reduced the cost of Face-to-face meetings between backed companies and VC investors (Bernstein et al. 2016). ...
... For several decades, the UK VC market is flawed with unevenly distribution of capital and the likelihood that the status quo to remain unchanged for few more decades is extremely high. The VC industry in nearly every nation it exists has lagging behind regions as evident in excerpts from Mason and Harrison (2002); Mason (2007); Cumming and Dai (2010;and Colombo et at. (2019). ...
Conference Paper
Venture capital plays a critical function in technological innovation and regional development by providing funds, and assisting to organise embryonic technology-oriented companies. Previous research has widely established an uneven geographic distribution of venture capital investments in the UK. There is still a broad gap in regional funding especially between London, South East England, and the rest of the United Kingdom. To an extent, company location influences demand for venture capital investments in UK regions. This paper investigates the investment activities of Local Venture Capital funds in the United Kingdom. More specifically the volume and flow of deals between UK regions, and in the context of this paper Local Venture Capital funds refers to VCs backing companies in the same region as the VC fund. Our result discloses that between the period of 1st January 2002 to 31st December 2017, UK based VC funds were involved in 62.5 per cent of all deals in UK. In a similar context within the paper, UK based VC funds refers to VCs resident in the United Kingdom and are involved in UK deals outside their region. Year-on-year investment transaction involving UK based VC funds investment dropped from 75.34 per cent in 2005 to 41.97 per cent in 2017. Based on findings, our analysis suggests availability of high human capital and a company geographic location plays vital role in attracting cross-regional venture capital investments in the UK. This paper contributes to existing research on regional development in the UK as it informs practitioners and policy makers on the implications of uneven distribution of funding in United Kingdom.
... As such, we address the relative underdevelopment of analyses of VC in economic geography and the neglect of questions concerning the role of finance in local and regional development (Wray et al., 2011). Traditionally, VC has been understood as a local phenomenon, embedded in formal and informal networks that provide information on and access to potential investment opportunities, support monitoring and value-adding activities, mitigate information asymmetries and support superior performance (Cumming and Dai, 2010;Devigne et al., 2018;M€ akel€ a and Maula, 2006;Sorenson and Stuart, 2001). However, VC, in terms of both the supply of capital (funds under management) and demand for investment (funds invested in portfolio companies), is highly concentrated in core economic regions (Corpataux et al., 2017;Harrison and Mason, 1992;Martin, 1999). ...
... In contrast, only 18.66% of first round investments involved FVC funds in Scotland, around 13% in Wales, West Midlands and the North West England, 11.20% in Yorkshire and only 7.55% in North East of England. Our findings are in line with previous research which suggests, first, that distance matters in VC investing (Cumming and Dai, 2010;Sorenson and Stuart, 2001;Vedula and Matusik, 2017), and second, that host country-specific factors (such as institutional development (Aizenman and Kendall, 2012;Balcarcel et al., 2010;Groh et al., 2010), economic growth (Schertler and Tykvova, 2011), smaller geographical distance (Colombo and Murtinu 2017), common language (Aizenman and Kendall, 2012), between-country trust (Bottazzi et al., 2016), closer economic integration (Alhorr et al., 2008) and strong industry networks between the foreign and host country (Madhavan and Iriyama, 2009)) are important. Our analysis also suggests, however, that these country-based explanations for FVC do not necessarily play out evenly across regions in the receiving country: notwithstanding suggestions (based on withincountry VC investing patterns) that there is less entry by outside VCs in more densely networked local VC markets (Hochberg et al., 2010); FVC and early-stage FVC in particular are strongly associated with the intensification of the existing spatialities of the industry in the UK (Corpataux et al., 2017). ...
Article
Venture capital plays a significant role in economic development through the emergence of new firms, technologies, industries and markets. This role, however, is associated with systemic uneven development regionally as both the supply of venture capital and the investment in new and growing ventures is highly concentrated regionally in the core economic regions of a country. Over the past decade, this intra-national regional concentration has been accompanied by an increasing internationalisation of the venture capital industry, as cross-border investment becomes more significant. In this paper, we explore the implications of this internationalisation for regional economic development in the UK. We conclude that the geography of venture capital in the UK has been shaped since the turn of the century by a significant increase in venture capital investments made by foreign funds, mainly in the form of co-investments with local funds. These foreign venture capital investments are primarily concentrated in London, Southeast England and East of England, which collectively attracted 82.5% of all foreign venture capital investments made to UK companies in 2017, strongly reinforcing the existing spatial concentration of venture capital investment. The paper concludes by questioning whether this increased dependency of these regions on foreign venture capital matters to regional development and draws out some of the implications for public policy.
... Foreign, well-established VC firms are more experienced in investing in early-stage, high-tech ventures. According to Cumming and Dai (2010), 64.3% of VC investments in the United States between 1980 and 2009 were in the information technology (IT) sector, compared with 18% in the medical sector, and 18% in other sectors. By contrast, Dai et al. (2012) document that most of the VC investments in Asia between 1996 and 2006 were not made in technology-related sectors, and that they were not early-stage investments. ...
... where C company I is the domestic portfolio company's culture based on measure I and C VC firm I is the culture measure of the domestic/foreign VC firm based on the same measure I as successful because VC firms generate returns primarily by exiting through these two channels (Dai et al., 2012;Giot and Schwienbacher, 2007). Previous studies of VC firms have also used this measure of VC investment success (see Bottazzi, Da Rin, & Hellmann, 2008;Cumming & Dai, 2010;Dai et al., 2012;Dai & Nahata, 2016;Nahata, 2008;Zarutskie, 2010). Moreover, using real performance data, Phalippou and Gottschalg (2009) empirically show that using both exit routes as proxies for performance is better than using only the IPO route. ...
Article
This paper examines the benefits of syndicating with foreign venture capital (VC) firms for domestic VC firms in emerging markets. We find that the VC firms that are domestic to their invested companies and previously syndicated with foreign partners invest proportionately more frequently in riskier ventures. After gaining syndication experience with foreign VC firms, a larger number of their portfolio companies are successfully exited, thereby suggesting improved performance. We hypothesize that this outcome is due to the organizational learning effects. While the previous research has shown benefits for foreign VC firms, our results show that domestic VC firms also benefit from international syndication through improved investments.
... 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. ...
Article
Building on the upper echelon and signalling theories, we hypothesize that perceptions about the corporate ethical behaviour 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 behaviour of the founding team. In turn, this could have implications for the decision regarding admission into a programme. 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 behaviour of the founding team enhance the likelihood of admission into an impact‐oriented accelerator programme. The role of perceived ethics appears to be stronger in the 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. ...
Preprint
Full-text available
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.
... As pointed out in [14], 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; ...
Preprint
Full-text available
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.
... 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). ...
Article
Full-text available
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. ...
Article
Full-text available
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). ...
Article
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. ...
Article
Full-text available
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). ...
Thesis
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. ...
Chapter
Full-text available
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). ...
Article
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.
... 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. ...
Thesis
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.
... However, as has been discussed extensively in previous literature, these metrics are not only suboptimal measures of quality but are also lagging indicators of impact-as such, their use can lead to suboptimal decisions in academic hiring, promotion and funding [1][2][3][4] . For-profit funding for scientific entrepreneurs is analogously susceptible to biases [5][6][7] . In both cases, the application of methods from artificial intelligence to the vast amount of data produced by the modern scientific enterprise could provide new, earlier or more meaningful signals of scientific impact and innovation, allowing us to, in a machine-assisted manner, learn from the history of science to proactively design improved research and funding strategies. ...
Article
Full-text available
The scientific ecosystem relies on citation-based metrics that provide only imperfect, inconsistent and easily manipulated measures of research quality. Here we describe DELPHI (Dynamic Early-warning by Learning to Predict High Impact), a framework that provides an early-warning signal for ‘impactful’ research by autonomously learning high-dimensional relationships among features calculated across time from the scientific literature. We prototype this framework and deduce its performance and scaling properties on time-structured publication graphs from 1980 to 2019 drawn from 42 biotechnology-related journals, including over 7.8 million individual nodes, 201 million relationships and 3.8 billion calculated metrics. We demonstrate the framework’s performance by correctly identifying 19/20 seminal biotechnologies from 1980 to 2014 via a blinded retrospective study and provide 50 research papers from 2018 that DELPHI predicts will be in the top 5% of time-rescaled node centrality in the future. We propose DELPHI as a tool to aid in the construction of diversified, impact-optimized funding portfolios.
... Further, the empirical specifications include a number of controls related to remaining new venture attributes. Similar to and Mollick (2014), we recognize that new ventures located in different entrepreneurial ecosystems may face a different probability of receiving subsequent funding from VCs because venture capital is not equally accessible for startups, but its availability varies across different geographical regions (Cumming and Dai, 2010;Kolympiris et al., 2011;Tian, 2011). As such, we introduce a dummy variable (Top Startup Ecosystems) indicating whether the new venture is located in the metropolitan area of one of the top 20 ecosystems worldwide for establishing and nurturing a startup, according to the Startup Genome Report (Marmer et al., 2012). ...
Article
Venture capitalists (VCs) make only a small number of investments and are more likely to invest in ventures where other VCs have invested previously. As such, valuable opportunities may be forgone if they are not funded by VCs in the first place. We demonstrate how crowdfunding (CF) can remedy this concern. Using a sample of new technology-based ventures, we reveal that ventures initially funded through reward-based CF can be even more likely than those initially backed by VCs in attracting follow-up funds from VCs. This happens when ventures originally funded via reward-based CF complement the certification they derive from CF with patents and a founding team with a track record of success. In those cases, VCs rely on the crowd more than their peers. Overall, the results suggest that signal complementarity can at least equalize the effectiveness of an a priori inferior and an a priori superior signal.
... Heughebaert and Manigart (2012) argue that having more investors involved in the investment decision is expected to improve the quality of the decision and reduce the risk of ventures (Jin et al., 2020). It is also well-documented that syndication alleviates the information asymmetry (Wright and Lockett, 2003;Cumming and Dai, 2010) and reduces overpricing (Cumming and Walz, 2010). Therefore, we examine the relationship between syndication and firm valuations. ...
Article
Full-text available
This study analyzes how investor attention to industries affects firm valuations in the venture capital market. Relying on aggregate search frequency in Baidu, we construct a direct measure of investor attention to industries (ASVI). Our results show that an increase in ASVI predicts higher firm valuations. We prove that the price increase is an attention-induced result rather than an information-based fundamental premium, which is due to the evidence of a long-run reversal of firm valuations and worse performance of VC investments. Our findings continue to hold across a wide range of robustness checks, including sample selection, endogeneity, alternative measures of ASVI. We also find that syndicated investments and involvement of experienced venture capitalists attenuate the effect of ASVI on firm valuations, further supporting the attention-induced view.
... 4 We use the 13F filing to classify the type of blocks, because by definition, shareholders who meet this requirement act as agents for a large number of clients, which is how we separate differences in the marginal cost of delegated monitoring. argue that shareholders who are physically close to companies are better able to monitor these companies (e.g., Coval and Moskowitz (1999) and Cumming and Dai (2010)). Collectively, these characteristics suggest that our sample of non 13F blockholders hold more focused, larger positions in smaller, geographically closer companies for longer periods. ...
... The market size has reached $10.2 billion in 2018 around the world and is expected to rise to $28.8 billion by 2025 at compound annual growth rate of 16%. 1 Equity crowdfunding 2 has been considered more complicated than other types of crowdfunding. It is because the platforms need to conduct extensive due diligence, and investors would like to know the entrepreneurs and their businesses better in order to make their investment decision (Cumming & Dai 2010;Vismara 2018a). By taking advantage of web 2.0, equity crowdfunding offers an online marketplace for entrepreneurs to raise money from their personal network such as family and friends as well as a vast number of potential investors. ...
... Given that venture capital (VC) investors generally rely on their local networks to source and screen investment proposals (Colombo, et al., 2019;Cumming and Dai, 2010;Sorenson and Stuart, 2001), network status is relevant in VC (Dimov, et al., 2007;Podolny and Castellucci, 1999) and plays an important role in cross-border VC investments (Alvarez-Garrido and Guler, 2018;Guler and Guillén, 2010a). Although past research on social networks and status has offered ample evidence of the general advantages of high network status (Greve, et al., 2014;Sauder, et al., 2012), the advantages are not equal in all circumstances (Bothner, et al., 2012;Jensen, 2008). ...
Article
Full-text available
Network status is generally considered to be a valuable firm asset; however, its effects are not well understood in the context of cross-border VC investments, as foreign VC firms can have different statuses in their home and host countries, and prior research has considered only the effects of home-country network status. Theorizing the importance of a foreign VC firm's network status in the host country for cross-border VC investments, we hypothesize a positive performance effect for network status in the host country. Furthermore, we theorize that the performance effect of a VC firm's network status in the host country is stronger in countries with weaker host-country regulatory institutions. We test these hypotheses using a global sample of cross-border VC investments and find support for our arguments.
... The market size has reached $10.2 billion in 2018 around the world and is expected to rise to $28.8 billion by 2025 at compound annual growth rate of 16%. 1 Equity crowdfunding 2 has been considered more complicated than other types of crowdfunding. It is because the platforms need to conduct extensive due diligence, and investors would like to know the entrepreneurs and their businesses better in order to make their investment decision (Cumming & Dai 2010;Vismara 2018a). By taking advantage of web 2.0, equity crowdfunding offers an online marketplace for entrepreneurs to raise money from their personal network such as family and friends as well as a vast number of potential investors. ...
Preprint
Full-text available
Equity crowdfunding has been gaining more and more relevance as an alternative way for entrepreneurs to raise capital. This paper examines the impact of retained equity, business angel backing, grants and intellectual property rights on the success of equity crowdfunding. Using data from Crowdcube, one of the leading equity crowdfunding platforms in the world, we obtain 473 pitches within the period from March 2017 to February 2020. We apply three empirical methods to analyse our data set: logistic regression, multiple linear regression and negative binomial regression. By running univariate test and several regression analyses, we find that retained equity has a significantly negative impact on funding success; also, the support of business angels helps entrepreneurs to achieve a funding success. While winning grants is more likely to attract investors, there is no direct evidence associated with funding success. Furthermore, it turns out that intellectual property rights are not relevant for funding success. In an extension, we reexamine our analysis in the light of the Corona crisis by analysing 95 pitches from March to November 2020. We find no structural changes in relevance of the success factors.
... Furthermore, our study contributes to extant literature on the "liability of foreignness" in a PE context as well as on local partnering as a strategy to overcome it. Cumming and Dai (2010) as well as Cumming and Johan (2006) find evidence for a local bias of PE firms and attribute it to PE firm's desire to avoid informational disadvantages that result from geographical distance. Humphery-Jenner et al. (2017) argue that PE backing serves as a signal to mitigate adverse selection problems in cross-border M&As caused by informational disadvantages of foreign acquirers. ...
Article
Full-text available
Using a dataset of 1149 global private equity transactions, we find that cross-border buyouts are associated with significantly higher valuation multiples than domestic ones. We attribute this finding to informational disadvantages of foreign acquirers. Consistent with this idea, we find that the spread in valuation multiples narrows when the target operates in a country with high accounting standards, when it was publicly listed prior to the buyout, and when information production is facilitated due to large firm size. Further results suggest that local partnering in a syndicate serves as an effective remedy to avoid adverse pricing effects. The spread in valuation multiples is also less pronounced for large buyout funds, presumably because they draw on sufficient organizational resources to cope with cross-border-related transaction costs.
... Also, the concept of localization is of significant importance to the process of globalization (Sheppard 2002;Murray and Overton 2015). In the process of financial integration, there is a "local bias" in financial services (Douglas and Na 2009). Enterprises tend to obtain financial resources from the local sources. ...
Article
Full-text available
The branch locations of financial firms have been widely used to construct financial network. China's financial main bodies are represented by banking industry, and commercial banks dominate the banking industry. However, there are some differences in the network characteristics of different types of banks. To extensively study the financial system and the changing trend of financial development in China, this paper explores the spatial pattern and localization of financial network based on different types of banks, including state-owned banks, joint-stock banks, foreign banks, city banks and rural banks. The results show that China's financial development is deeply rooted in the special Chinese economic system. Guided by state regulations and relations, state-owned banks follow the administrative principle to expand and allocate financial resources nationwide. Joint-stock banks follow the market principle to expand. Foreign banks expand in the principle of geographical openness. City banks and rural banks expand in the principle of geographical proximity. By comparisons, the study found that Beijing's primary position is due to the large concentration of state-owned banks, while Shanghai has the most mature financial market system and has more potential to become a financial centre with global influence.
... Indeed, a large body of work indicates that equity investors require close relational interactions and proximity (often face-to-face interactions) with their recipient firms (De Clercq; Sapienza, 2006). VC investors often use their personal networks to elicit deals and then oversee their investee firms by staying "close to their money" (Shane and Cable, 2002;Cumming and Dai, 2010;Colombo et al., 2019). Therefore, given the innately relational nature of entrepreneurial finance, there are strong, a priori, theoretical reasons for expecting sources of equity finance to be hit hard by shocks such as pandemics given the need for face-to-face contact between investors and entrepreneurs. ...
Article
Full-text available
This paper illustrates how chronic uncertainty caused by crisis events affects the availability of entrepreneurial sources of finance for start-ups and small and medium-sized enterprises (SMEs). To explore this line of argument, this paper examines Crunchbase real-time data examining entrepreneurial finance investments in China during unfolding Covid-19 crisis. The paper shows that these equity investments slumped dramatically in the immediate aftermath of the Covid-19 virus, resulting in a year on year decrease of 60% in the total volume of investment raised between quarter 1 in 2019 and quarter 1 in 2020. Importantly, the paper found early-stage seed investments falling the steepest, suggesting nascent start-ups are those most heavily affected by the crisis. While the global financial crisis heavily hit debt markets, the relational nature of equity investments may mean entrepreneurial finance is even more susceptible to major upheaval caused by the Covid-19 crisis. Overall, enterprise policy makers need to become better attuned at monitoring real-time data sources to mitigate chronic entrepreneurial uncertainty via strategic policy responses.
... Venture creation is heavily influenced by the misalignment between values, expectations and resources found within a singular ecosystem. Social and financial bias within innovation ecosystems is well researched domain, (Cumming and Dai 2010;Grube 2020). It has also been identified that the efforts by entrepreneurs to manage individual uncertainties may contribute the the production and growth of new uncertainties across the ecosystem (de Vasconcelos Goms, et al. 2018). ...
Thesis
Full-text available
Current models of entrepreneurship celebrate rapid experimentation and the open sharing of ideas to inspire new innovations in business. These models draw upon a range of resources such as technical expertise, infrastructure, and capital. To provide these resources, public and private institutions have collaborated to build innovation ecosystems to supply entrepreneurs with ideal conditions for business creation, and by extension, to drive regional economic development. Yet this entrepreneurial model has also wreaked havoc on the world. The aggressive focus to design for immediate user needs in product design, with less consideration of future social consequences, has created vulnerabilities in products and companies for exploitation. Disinformation campaigns by nefarious actors have divided communities, undermined elections, and jeopardized global security. While the design literature demonstrates the value of design processes for complex problems in business and society, there is no current expertise in the field of design to inform new venture creation for preferred social outcomes or to combat the threat of disinformation. The companies and products produced by innovation ecosystems have in turn produced the global threat of disinformation. This research explores the role of design to create new ventures, to contend with disinformation, and to design products to afford more positive global consequences. I conducted practice-based research over six years, as a form of action research, and consolidated my work into four case studies. I described the conditions of the Pittsburgh innovation ecosystem, the factors that inform venture creation, explored lean methods, and built rapid prototypes to formulate a venture concept. I founded the company Symkala and developed material artifacts at every stage of business creation to navigate the surplus of entrepreneurial challenges such as recruitment, ideation, production, and customer acquisition. Symkala built a geographic information systems (GIS) software. Symkala offered a novel workflow for a GIS analyst to apply supervised machine learning techniques to poorly structured information for geographic data analysis. I then marketed this software to federal and non- government organizations throughout Washington DC. Insights from this work were then applied to redesign Geo4NonPro, a website intended to promote accurate information and citizen participation for global nuclear security via an interactive GIS interface. These case studies additionally informed a trajectory of practice transformation. A review of the literature and selected artifacts from the case studies, alongside reflection on action, establish insights on design for new venture creation within innovation ecosystems, design to counter disinformation, and product design for systems-level impact. I found that a robust innovation ecosystem does not directly culminate into a successful venture due to resource bias, and therefore a focus on customer research through material production can enable entrepreneurs to work more slowly and mindfully to achieve bold visions. To counter disinformation through products, firms need to prioritize information validity as a central business goal, forcing changes to the organizational structures and processes that guide product delivery. To more effectively channel systems-level insights into human-scale products, the design process must prioritize clarity in goal formation, product definition, and attention to social equities throughout production.
... Whether in or outside of metropolitan areas, many entrepreneurial ventures have difficulties acquiring funding from external sources in the early stages of the development (Casey and O'Toole 2014; Townsend and Busenitz 2015). Only a very small number of new ventures are likely to attract venture capital, as venture capitalists tend to be highly selective (Cumming and Dai 2010). Besides, in many countries, bank financing constitutes the main source of external financing in many entrepreneurial ventures, particularly in the funding of day-to-day activities (Cassar 2004;Beck et al. 2011;Hernández-Cánovas and Martínez-Solano 2010). ...
Article
Full-text available
In this paper, the effect of local bank branch closures on new firm formation in Sweden is analysed using a panel database that captures the geographical locations of all Swedish bank branches in 2007 and 2013. The previous research has shown that the further a firm is located away from the bank, the higher the monitoring costs will be for the banks. Furthermore, an increase in the distance to the banks will also increase information asymmetry because of the banks’ eroded ability to collect and analyse soft information. Due to the high risks associated with the lack of information and uncertainty, banks might not be as willing to extend credits to a distant firm compared to a nearby firm. Using spatial econometric analysis at a municipal level, it is shown that bank proximity to firms, unemployment rate, industry structures, income growth, change in housing price and percentage of immigrants are vital for new firm formation in Sweden. From the spatial Durbin model with fixed effects, an increase in the weighted distance to the nearest bank branches is shown to affect new firm formation negatively.
... Theoretically, such financial capital could be available independent of geographic boundaries, but in reality, regional connections do matter (Zook, 2002). Even with the ubiquity of technologies that enable long-distance connections, venture capitalists and angel investors still prefer to invest in geographically proximate ventures because of the high costs and uncertain outcomes of early stage commitments (Cumming and Dai, 2010;Kolympiris et al., 2017;Vedula and Matusik, 2017;Vedula and Fitza, 2019). Research has revealed similar regional preferences for other forms of financing besides equity funding, such as bank loans and government grants. ...
Article
Full-text available
Our study addresses a popular question in entrepreneurship research-to what extent does the quality of a region's entrepreneurial ecosystem matter for venture survival? To tackle this question, we created a regional entrepreneurial ecosystem quality index based on five key characteristics: supportive entrepreneurial culture, access to finance, availability of human capital, innovation capacity , and formal support organizations. We analyze 301 United States Metropolitan Statistical Areas for these characteristics and measure the aggregated contextual influence on venture survival within these regions over time. In addition to analyzing the relationship between this index and venture survival, we also consider the moderating role of founders' experience on survival outcomes. Our findings confirm that, in general, higher quality ecosystems shelter ventures, while ventures in weaker ecosystems are more likely to fade away and fail. However, for serial entrepreneurs, we find that ecosystem quality has a much smaller impact on venture survival.
... However, Douglas Cumming has an influential agenda in both E&M and FIN literature (Blue cluster). The successful of theses scholars in leading the VC research agenda is not the topics of their analyses, but is that all have explored critical issues along the whole cycle of the VC (Gompers and Lerner 1999;Cumming and Dai 2010;Lockett, Murray, and Wright 2002;Cumming 2008;Bruton, Filatotchev, and Chahine 2010). These articles analyze the following aspects: diversification strategy in VC markets (Zhang 2014) and corporations (Baldi, Baglieri, and Corea 2015), the effects of VC investors on the price discount in IPO firms (Ginsberg, Hasan, and Tucci 2011), and dynamic capabilities to enhance entrepreneurial competences during the venture monetarization stage (Mishra and Zachary 2015). ...
Article
A framework of the venture capital (VC) process, encompassing the (1) pre-investment phase, (2) management phase, (3) exit phase, and the interrelationships between them was developed into a cycle using the exit phase in a feedback loop. The review of 166 articles from top-tier, Grade 4, journals suggests that most prominent Entrepreneurial & Management (E&M) literature assesses the VC operating environment, and the managerial expertise and skills of both VC firms and entrepreneurs independently. Finance Literature, however, centers its independent analysis on contracts, risk, returns and VC governance. A network analysis follows comparing E&M and Finance literature VC research agendas by country, author, institution, and journal. Finally, the manuscript identifies trends and future areas for VC cycle research by comparing and exploring the current state and progress of the VC cycle in Entrepreneurial literature.
... Hence, in order to avoid interference with selections of samples and ensure the robustness of final conclusion, a two-stage regression approach is adopted in this current study to analyze the feature of endogeneity. Furthermore, Cumming and Dai(2010) Table 9. positive correlation at the level of 1% on the basis of controlling other variables, which validates the tool variables defined in this study. Results of the second stage shows that VC and ICD possess positive correlation at level of 1%, which is consistent with previous findings. ...
Conference Paper
Full-text available
This paper is designed towards a further understanding between Venture Capital (VC) and Internal Control Deficiencies (ICD) by consolidating previous findings and proposing a VC "assurance and supervision" hypothesis, which is opposite to the "moral hazard" hypothesis. To verify the hypothesis, data collected from companies listed on China Growth Enterprise Market (GEM) between Year 2010 and Year 2014 is adopted to examine whether VC exemplifies inhibitory functions in reaction to ICD. Results of the current study are shown as follows: firstly, compared with non-venture-backed companies, venture-backed companies are less likely to encounter ICD; secondly, followed by the increase of VC shares in venture-backed companies, there is a decreased trend in appearances of ICD; thirdly, it is identified that ownership concentration affects the inhibitory functions of VCs in relation to ICD; lastly it is also observed that VCs from corporate sources, among various possible sources, appear to exhibit the most significant inhibitory capabilities in response to ICD.
Article
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.
Article
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.
Article
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.
Article
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 FundIn 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 outcomesIn 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.
Article
Full-text available
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.
Conference Paper
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.
Article
Research Summary Venture capital firms predominantly source investments from local networks within tight geographic bounds. Against that tendency, VCs are increasingly investing internationally—but with substantial heterogeneity across firms in extent, location, and success. We propose a mechanism that explains these patterns. The ties VCs form to immigrant entrepreneurs when investing domestically provide access to the knowledge and connections of those immigrants, which facilitates VC investments in the immigrants' homelands. Using data on U.S. VC activity in India, we find that firms invest in more Indian startups as their ties to Indian entrepreneurs in the U.S. increase—particularly in the Indian region where immigrants originate and when the VC faces heightened domestic competition. Such ties also enhance the odds of successful exit for the VC's Indian investments. Managerial Summary Why are venture capital firms increasingly investing in foreign startups, and why do these firms differ in the location and success of such international investments? We demonstrate that the ties to immigrant entrepreneurs VCs establish when investing domestically provide knowledge and connections that enable future VC investments in the immigrants' homelands. Using data on U.S. VC firms, we find that the more ties to Indian immigrant entrepreneurs a firm develops, the more it subsequently invests in Indian startups. This effect is stronger when the VC firm faces heightened domestic competition (a push effect) and in the specific regions of India where the immigrants originate (a pull effect). Domestic ties to Indian immigrants also help U.S. VCs make more successful investments in India.
Article
Investors within a Business Angel (BA) group are embedded in a cohesive network of relationships that arises from past joint investments. In this paper, we have studied how the network position of a BA within this network affects the likelihood that a company will receive investments from the BA group. We have hypothesized a curvilinear, inverse U-shaped relationship between the centrality of the BA and the probability of a company being funded by the BA group. Moreover, we have explored how the experience of a BA and the geographical proximity between the BA and the company influence such a relationship.
Article
Full-text available
Using gender homophily and gender socialization as theoretical foundations, the current study takes the position that both funder-driven (supply-side) and entrepreneur-driven (demand-side) processes perpetuate the gender gap in venture funding. Using this positional anchor, I performed a meta-analysis on gender-funding associations. The results show that gender-funding associations are different across funding contexts, which is consistent with what gender homophily and a funder-driven perspective might suggest. However, the nature of the difference depends on whether the outcome is funding amount or funding success. In addition, business size and industry sector were found to fully mediate the relation between entrepreneur gender and funding needed. This finding is consistent with what gender socialization and an entrepreneur-driven perspective might suggest. The mediation results ultimately suggest that female entrepreneurs need less funding for their ventures, which in turn results in less funding amounts but greater funding success. As such, there is one gender gap to the disadvantage of female entrepreneurs (funding amount) and another gender gap to the advantage of female entrepreneurs (funding success). Together, the perspectives and findings presented in this paper provide insights for both research and practice on the gender gap(s) in venture funding.
Article
Full-text available
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.
Article
Full-text available
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)
Article
Full-text available
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.
Article
Full-text available
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.
Article
Full-text available
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.
Article
Full-text available
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.
Article
Full-text available
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.
Article
Full-text available
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).
Article
Full-text available
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.
Article
Full-text available
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.
Article
Full-text available
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)
Article
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.
Conference Paper
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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)
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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..
Article
"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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.