Cultural proximity, venture capital and firm performance

Abstract

Cultural distance is an important factor for the success of venture capital (VC) investments. Using a large sample of Chinese VC events, this study examines how cultural proximity between VC investors and portfolio firms, as measured by a unique indicator using Chinese dialects, affects the performance of venture capitalists while exiting portfolio firms. We find that VC investors with cultural proximate portfolio firms are more likely to exit successfully. Our study further indicates that VC investors with less cultural proximity are more likely to obtained improved financial returns when they successfully exit from the investment.