In recent years, venture capital (VC) investments across national borders have started to trend upwards. Foreign or cross-border investment in venture capital markets has increased from 10% of all venture capital investments in 1991 to 22.7% in 2008 (based on number of venture capital investments). An important driver of this increase is the significant upward trend in international venture capital investments in emerging nations over this time period. The number of venture capital investments by international investors as a fraction of total venture capital investments in emerging nations increased from 8.7% in 1991 to 56% in 2008.
There has also been an increase, although more modest, in the number of international venture capital investments as a fraction of all venture capital investments in developed nations over the same time period (10.1% in 1991 to 20% in 2008). While the venture capital industry originated in the US, a number of non-US economies have developed their own venture capital industries, with a significant number of local venture capitalists investing in entrepreneurial firms in their own countries. However, there has been little research on the geography of international venture capital investments, and in particular, on the effectiveness of international versus local venture capitalists in adding value to entrepreneurial firms. The objective of this paper is to fill this gap in the literature.
We address a number of interesting questions in this context. First, how do international venture capitalists compare in effectiveness with local venture capitalists or a syndicate consisting of both international and local venture capitalists? Second, what are the factors that determine the effectiveness of international venture capital investments? In particular, how does the distance from the home country of the venture capitalist to that of the entrepreneurial firm affect the success of international venture capital investments? A related question is how the syndicate structure of a venture capital investment affects the relation between venture capitalist distance (i.e., distance from the home country of the international venture capitalist to that of the entrepreneurial firm) and the success of the venture capital investment.
Third, what are the factors that determine the propensity of an international venture capitalist to syndicate with a local venture capitalist and his choice to invest in early versus late stage firms? In particular, what is the effect of the distance from the home country of the international venture capitalist to that of the entrepreneurial firm on the propensity to syndicate with local venture capitalists and to finance early stage firms? Fourth, what determines the staging of international venture capital investments? Specifically, how does distance from the home country of the international venture capitalist to that of the entrepreneurial firm and syndicate structure affect staging? Also, how does staging affect the relation between venture capitalist distance (i.e., distance from the country of the international venture capitalist to that of the entrepreneurial firm) and the success of the venture capital investment? Finally, how does local venture capitalists’ decision to syndicate with international venture capitalists relate to their prior syndication experience with international venture capitalists? We address the above questions differentiating between international venture capital investments in emerging versus developed economies. We use the probability of successful exit through an IPO and post-IPO operating performance as the outcome variables in our analysis.
