Do Local and International Venture Capitalists Play Well Together? The Geography of International Venture Capital Investments

Abstract

We explore the strengths and weaknesses of international and local venture capi- talists (VCs) and how the syndicate composition of VC-backed entrepreneurial firms across various countries determines their success. We find that entrepreneurial firms backed by syndicates composed of international and local venture capitalists are more successful than those backed by syndicates of purely international or purely local ven- ture capitalists. We control for the potential endogenous participation and syndication by international VCs using instrumental variables analyses. We also utilize the in- cidence of terrorist attacks as an exogenous source of variation in international VC participation in syndicates and find a causal effect of international VC participation on successful outcomes. International VCs face disadvantages in their investments due to the lack of proximity to the entrepreneurial firm. Using air service agreements be- tween the country of the entrepreneurial firm and that of the international VC as an exogenous change in effective proximity, we find that entrepreneurial firms backed by international VCs are more successful when they become effectively closer: i.e., as travel becomes easier between the two countries. On the other side, local venture capitalists face disadvantages due to their lack of experience in VC investments. Local VCs' lack of experience is mitigated by a greater extent of syndication with international VCs as well as by a greater extent of development of the local VC market. Overall, our results indicate that the greater venture capital expertise of international venture capitalists and the superior local knowledge and lower monitoring costs of local venture capitalists are both important in obtaining successful investment outcomes.