The Effect of Venture Capital Networks and Institutions on Portfolio Companies’ Performance in Southeast Asia

Abstract

Venture capital firms (VC) have encountered with uncertainty and risk of asymmetric information due to an investment in early-to-growth stage and technology-based start-ups. Venture capital syndication network helps reduce a broad gap of information asymmetry and agency problem in a venture capital investment. Although agency and asymmetric information theory help motivate the formation of networks in emerging venture capital markets, Institutional theory is more suitable in explaining this situation, as the practice of venture capital appears to be influenced from institutional changes. As network connections are found to be the success factor for venture capitalists under a lack of fully developed institutional environment in emerging market. Venture capital industry in Southeast Asia is nascent yet in demanding and fast growing. Southeast Asia (SEA) is one of the most significant and dynamic propellers of the world economy. To clarify the role of networks and institutions on VC-backed firms in SEA VC market, we then investigate the relationship between networks and institutions and their impact on portfolio company’s performance. We quantified VC networks with more tangibly and visibly quantitative approach by applying social network analysis. We further proposed a theoretical framework representing that different level of VC networking involved in different institution development offers different performance advantages of VC backed companies. Our study initiated an empirical evidence by quantifying VC networks and institutions among SEA countries and implementing time-series pooled regressions through the performance of VC-backed companies. The result reveals that VC network could compensate for less formal institution in providing a better performance of their portfolio companies. There is joint effect in terms of the substitution and support between institutional development and VC network centrality within Southeast Asian syndication networks on shaping portfolio companies’ profitability. Other interesting issues found in this study include success factors of ventures beside venture capital networks and the negative VC network effect in Singapore.