Is Venture Capital a Local Business? A Test of the Proximity and Network Hypotheses

Abstract

Venture capital (VC) investment has long been conceptualized as a local business, in which the VC’s ability to source, syndicate, fund, monitor, and add value to portfolio firms critically depends on their access to knowledge obtained through their ties to the local (i.e., geographically proximate) social network. Curiously, emerging research on VC investment practice within the United States finds that cross-border investment has become increasingly common and that cross-border investment, as measured by “exits” (either initial public offering or merger & acquisition) out-performs local investment. These findings raise important questions about role of proximity in VC performance, and, more specifically, about the relationship between geographic and relational proximity in social networks. To more deeply probe these questions, we develop theory and test it by contrasting the deal and syndicate structure used to implement cross-border VC investment with those used for domestic VC investments. Evidence from 139,892 rounds of venture capital financing in the period 1980-2009 raises questions about the “local business” hypothesis and suggests that that the effects of geographic and relational proximity on VC firm performance differ. We conclude the evidence raises important questions about role of proximity in social networks, as well as the ability of VC firms to capture and lever the presumed benefits of local social network membership.