International Venture Capital Research Articles

Why Venture Capital Firms Internationalize: Performance Effects on Cross-Border Investments

The venture capital (VC) industry, which has traditionally been considered a local business, becomes increasingly internationalized with cross-border investments accounting for 31 percent in 2020. This attracted scholars from multiple disciplines, who have placed a strong focus on foreignness-related performance consequences. In our study we adopt a novel perspective on VC firms’ motives to venture abroad, investigating the reverse performance relationship. Grounded in performance feedback theory, we hypothesize VC firms’ financial performance shortfalls below aspiration levels trigger a process of problemistic search. This search leads to an increased likelihood of cross-border investments and greater distance between VC firm and investee countries, both in terms of psychic and geographic distance. We find strong support for our hypotheses and conclude underperforming VC firms are pushed out of their home markets into more distant host markets. Our study complements the scarce research on the effects of performance feedback on firm internationalization and extends it to the VC industry. In addition, we contribute to the growing body of knowledge on international VC and provide stakeholders along the venture capital financing process with insights into their business partners’ motives to venture abroad.

International Venture Capital and Post-Policy Economic Development: Why Innovation and High-Growth Entrepreneurship have Leapfrogged the State

International Venture Capital and Post-Policy Economic Development: Why Innovation and High-Growth Entrepreneurship have Leapfrogged the State

International Venture Capital Attractiveness and Performance: A Neo- Configurational Perspective

Prior research suggests that market-supporting institutions are critical to attracting international venture capital (IVC), yet venture capital firms have been increasingly investing in countries characterized by institutional weaknesses. Consequently, the role of national institutions in attracting IVC firms remains unclear. We employ a neo-configurational institutional perspective to explore the institutional contexts that make countries attractive to IVC investment and favorable to IVC performance, thus illuminating the implied risk-reward tradeoffs in IVC firm location choice and ability to navigate institutional weaknesses. Utilizing fuzzy-set Qualitative Comparative Analysis, we find that a robust political system, transparent product markets, and openness to competition are key drivers of IVC investment attractiveness, but each requires complementary labor or capital market institutions. In contrast, well-functioning institutions do not necessarily lead to higher performance by IVC firms, suggesting that IVC firms may especially contribute to the success of ventures in economies with institutional weaknesses. We discuss implications for theory on venture capital firm internationalization as well as policy implications particularly relevant to the Asia-Pacific region.

A neo-configurational institutional analysis of international venture capital attractiveness and performance: insights for Asia-Pacific

Prior research suggests that market-supporting institutions are attractive to international venture capital (IVC), yet paradoxically VC firms increasingly invest in countries characterized by institutional weaknesses. In this study, we explore the institutional contexts that make countries attractive to IVC investment and favorable to IVC performance, thus illuminating the implied risk-reward tradeoffs in IVC firm location choice and ability to navigate institutional weaknesses. Utilizing fuzzy-set Qualitative Comparative Analysis (fsQCA), we find four distinct configurations of institutions associated with IVC attractiveness. Each configuration allows for some institutional weaknesses, enabling us to elaborate theory on institutional complementarities and substitutions that drive IVC investment. Further, we find that IVC firms have performed well even in countries with pervasive institutional weaknesses, suggesting that IVC firms may uniquely contribute to the success of new ventures in such institutional contexts. We discuss implications for theory and offer policy and managerial recommendations particularly relevant to IVC activity in the Asia-Pacific region.

Risk, capabilities, and international venture capital syndication in China

PurposeThe purpose of this paper is to advance a holistic model of venture capital (VC) firms’ syndication decisions in an emerging economy. When considering syndication with local partners, VC firms consider multiple sources of risk related to firm-specific characteristics (life-cycle, operational and political). In conjunction with these risk factors, they also consider their own capabilities, namely, their knowledge breadth and knowledge depth. Knowledge breadth stems from a VC firm’s network position and knowledge depth is a result of its prior industry expertise. Together, these capabilities have competing impacts on VC firms’ desire to syndicate. From one perspective, VC firm capabilities may help deal with risk such that syndication may not be perceived as necessary. Alternatively, VC firm capabilities may signal attractiveness to a local partner and allow the VC firm to syndicate more easily.Design/methodology/approachFuzzy-set qualitative comparative analysis is conducted on a sample of 111 US VC firms investing in China between 1993 and 2010.FindingsLower VC firm capabilities are associated with a tendency not to syndicate with a local partner when venture risk factors are low. This pattern may arise because of such VC firms’ relative lack of experience with partnership management or weaker appeal to local partners.Originality/valueThis study is one of the earliest attempts to develop a neo-configurational perspective within the VC literature and thus contributes to a more nuanced understanding of international VC firms’ strategic behaviour in emerging economies by examining multiple risks and capabilities simultaneously and in conjunction.

Cloud computing in high tech startups: evidence from a case study

ABSTRACTThis paper focuses on the implementation of cloud-based systems in startups to answer how and why hi-tech startups use cloud computing, an overlooked question to date. Thus, referring to an extended version of Ross and Blumenstein [2015. “Cloud Computing as a Facilitator of SME Entrepreneurship.” Technology Analysis & Strategic Management 27 (1): 87–101] framework, encompassing issues of context and culture following Spanò et al. [2019. “Context, Culture and Control: A Case Study on Accounting Change in an Italian Regional Health Service.” Journal of Management and Governance. doi:10.1007/s10997-019-09458-0], we analyse cloud adoption in startup firms and rely upon a case study of an Italian hi-tech startup. The case study allowed us to tap into the main issues relating to cloud implementation that is increased opportunities, reduced costs, scalability, access to global markets, and access to international venture capital. The results offer interesting insights to the literature on cloud computing, and also have some managerial implications in that they better unfold the effects played by context and culture.

VENTURE CAPITAL INTERNATIONALIZATION: SYNTHESIS AND FUTURE RESEARCH DIRECTIONS

AbstractResearch on venture capital (VC) internationalization has expanded rapidly over the last decade. This paper reviews the extant literature on VC internationalization and highlights gaps in our knowledge. We identify three major research streams within this literature, which revolve around the following questions: (1) which VC firms invest across borders and what countries do they target; (2) how do VC firms address liabilities of foreign investing; and (3) what are the real effects of international VC investments? We provide an overview of the contributions in these research streams, discuss the role of public policy, and suggest avenues for future research. Specifically, we call for a deeper understanding of: (1) the functioning and impact of VC firms’ modes of internationalization; (2) micro‐level processes such as the functioning and decision making of international investment committees, or the development of international human and social capital; (3) the role of country institutions in VC internationalization and its real effects; and (4) the interplay of international VC with alternative financing sources.

Local competence building and international venture capital in low-income countries

PurposeThe purpose of this paper is to shed light on the changing pattern and characteristics of international financial flows in the emerging entrepreneurial ecosystems of Sub-Saharan Africa (SSA), provide a novel taxonomy to classify and analyze them, and discuss how such investments contribute to competence building and sustainable development.Design/methodology/approachIn an exploratory study, the authors analyze the characteristics of international venture capital investors and the start-ups receiving funding in Kenya and map their interaction. The authors proceed by developing a novel taxonomy, classifying investors according to their main rationales (for-profit-for-impact), and start-ups according to the locus of needs and markets addressed by the start-up (local-global) and the locus of the start-ups capacity and knowledge (local-global).FindingsThe authors observe a new type of mainly western investors who support innovative ideas in SSA by identifying and investing in domestically developed technical innovations with the potential to address global market needs. The authors find such innovations to be mainly developed at the intersect of global and local knowledge.Originality/valueThe authors shed light on the – up to now – under-researched emerging phenomenon of international high-tech investments in SSA, and develop a novel taxonomy of technology investments in low-income countries, guiding further research on the conditions, impact, practical, and policy implications of this new form of finance flows.

A Comment on 'Essays on International Venture Capital by Arash Soleimani Dahaj, a Thesis Presented to the University of Waterloo in Fulfillment of the Thesis Requirement for the Degree of Doctor of Philosophy in Management Sciences (2017)'

A Comment on 'Essays on International Venture Capital by Arash Soleimani Dahaj, a Thesis Presented to the University of Waterloo in Fulfillment of the Thesis Requirement for the Degree of Doctor of Philosophy in Management Sciences (2017)'

Modelling The Behavior of the Venture Capital Industry - Evidence from Egypt

The objectives of this exploratory study are to investigate the behavior of the Venture Capital (VC) industry in Egypt, and to test whether there are relationships among the suggested dependent variables. We are studying the domestic VC industry through two dependent variables; i.e. 1) Patent Application Count representing the Innovation level, 2) Domestic Credit to Private Sector representing the private capital funding. Also we examine the international VC through the Foreign Direct Investment (FDI). We find positive significant relationship between the FDI and the Net Foreign Assets, the Gross Capital Formation and the Natural Gas Rents (% of GDP), while there is a negative significant relationship with the Broad Money. For the Domestic Credit to Private Sector, we find a positive significant relationship with the Merchandise Exports, the FDI and the Manufacturing Value Added (% of GDP), while we find a negative significant relationship with the Gross Savings (% of GDP). For the Patent Applications Count, we find a significant positive relationship with the Domestic Credit to Private Sector, the FDI, the Education Expenditure, the Gross Savings, the Industry Value Added and the Primary Education (Pupils) while negative significant relationship with GDP. We find that FDI is positively and significantly affecting both other dependent variables while both; i.e. FDI and Domestic Credit to Private sector, are positively and significantly affecting the Patent Applications Count.

Building a Venture Capital Market in Vietnam: Diffusion of a Neoliberal Market Strategy to a Socialist State

Vietnam’s venture capital (VC) industry took shape in the late 1990s during a period of exceptional economic growth in the country and the development of its high-technology sector. High growth rates and technological advances have typically coincided with both strong VC market activity and state support of equity financing. This, however, has not been the case in Vietnam. In this article a policy diffusion framework is used to investigate the international and domestic origins of Vietnam’s nascent VC policies, and how they became part of the agenda of the Communist Party of Vietnam (CPV) as credit-based, rather than equity-based, solutions. The article argues that Vietnam’s heterodox approach to VC policy results from both external forces from donors and from domestic factors. In particular, Vietnamese policymakers have a preference for credit-based SME financing solutions and Vietnam’s official development assistance providers diffuse expertise on loans, not equity investments, to the Socialist Republic. The only donors recommending VC and equity-based financing in Vietnam have gone “around the state” rather than through it by working directly with the private sector. As a result, Vietnam’s SME financing initiatives have significantly diverged from international VC policy patterns.

Transferability of Status and Experience Advantages in International Venture Capital Investments

What are the boundary conditions for the transferability of firm status and experience advantages to host countries in international expansion? Building on network, learning, and institutional theo...

THE IMPORTANCE OF THE DEPTH OF THE CAPITAL MARKET ON INTERNATIONAL VENTURE CAPITAL AND PRIVATE EQUITY ALLOCATION DECISIONS: THE CASE OF POLAND

This paper addresses the issue of international Venture Capital and Private Equity allocation. The study provides a discussion of the key parameters that determine the international allocation process of private equity funds. This article aims to assess the impact of the depth of the stock market in Poland on international venture capital and private equity allocation decisions. The purpose of this paper is also to focus on the investigation of venture capital and private equity investment trends in Poland. The research methods used are based on systematic and comparative analysis of scientific literature, logical analysis and synthesis, and the analysis of statistical data and results of a questionnaire-based survey. The statistical data used in the article has been based on publications of the Polish Private Equity Association and reports of the European Private Equity and Venture Capital Association (EVCA). The information contained in EVCA reports was based on „PEREP Analytics” data. „PEREP Analytics” is a centralised, non-commercial pan-European private equity database. The „PEREP Analytics” statistics platform monitors the development of pri­vate equity and venture capital in 25 European countries. The article reveals that Poland is similar to the other Central and Eastern European countries with respect to the ratio of private equity investment to gross domestic product (GDP), but there is a major difference which ultimately leads to its attractiveness: this is the size, number of initial public offerings (IPO) and capitalization of the Warsaw Stock Exchange. The total number of IPOs (105) which took place in Warsaw represent 40% of all IPOs in Europe in 2012. The total value of IPOs (EUR 731 million) ranked the WSE in fifth position among those exchanges operating in Europe’s most developed capital markets. Research results indicate that in Poland the second most common exit route for PE funds was divestment by public offering - €36.7m in 2011. The results will be useful to fund managers in improving their private equity allocation decisions in Central and Eastern Europe. The study focuses on the most recent period of development of the VC/PE market in Poland. DOI: http://dx.doi.org/10.5755/j01.em.18.2.4225

The internationalization of venture capital

PurposeThe purpose of this paper is to investigate the factors which affect the market for international venture capital (VC) investments, relying on comprehensive deal‐level data sources, covering three decades and about 100 countries.Design/methodology/approachA gravity analysis indicates that distance, common language, and colonial ties may have been significant factors in directing these flows.FindingsThe paper documents major shifts in the nature of international flows. The presence of high‐end human capital, a better business environment, military expenditure, and deeper financial markets are important local factors that appear to attract international VC. There is some evidence indicating network effects and/or fixed costs of entry may be at work. France, Israel, Canada, India and China were consistent net importers of VC deals, with China emerging as the largest net importer of VC.Originality/valueThe paper investigates the increasing internationalization of VC investments in recent years and assesses the factors which determine the destination of cross‐border VC investment flows.

Catalyzing capital for Canada's life sciences industry

Canada's biotech sector ranks within the top five globally, but its life sciences venture capital (VC) industry is among the worlds weakest. This makes for an interesting case study in understanding the disconnect between low levels of VC and a healthy innovation ecosystem in terms of R&D spending, skilled workforce and enterprise support. Three key provinces (Quebec, Ontario and British Columbia) that have taken significantly different approaches to attracting VC are large enough to attract as much government investment as whole emerging markets. The aim of this article is to present evidence from a Canadian natural economic experiment in order to evaluate the effectiveness of varying government policies in attracting VC investment, to illustrate how these policies need tailoring to individual sub-sectors of the life sciences sector, and to highlight potential policy mechanisms that may be applicable beyond Canada's borders. We employ VC returns on investment (ROI) and exit data as a proxy for our evaluation. Our results suggest that government biotechnology investment needs to be structured end-to-end from early to late stage in order to be successful, that prevalence of private and international VC flows is critical for generating market efficiency, and that there is an ‘optimal’ efficient amount of capital before ROI result in diminishing returns.

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

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.

The impact of liability of foreignness on international venture capital firms in Singapore

This empirical study explores the impact of the liability of foreignness on international venture capital (VC) firms in Singapore as well as the response. In the stage of VC deal assessment, international VC firms are found to originate fewer unsolicited deals from networks compared to domestic ones due to the liability of foreignness. In response to such liability, international VC firms primarily use their homegrown advantages, and originate more solicited deals from networks.

The Internationalization of Venture Capital and Private Equity

This paper investigates the internationalization of venture capital (VC) and private equity (PE) investments. We derive flows between countries of VC and PE investments worldwide, relying on comprehensive firm-level data sources, covering three decades and about 100 countries. A gravity analysis indicates that distance, common language, and colonial ties are significant factors in directing these flows. Additionally, the presence of high-end human capital, a better business environment, high levels of military expenditure, and deeper financial markets are important local factors that attract international venture capital. There is also evidence of path dependency and persistence in VC and PE flows, indicating network effects and fixed costs of entry may be at work. Further analysis suggests the internalization of VC and PE is an ongoing story. Prior to the 1990s, VC was primarily a US-only phenomenon. The globalization of IT activities induced the US venture capital industry to mature, and to start exporting its unique skills as VC managers. The US is now a dominant net exporter of deals, though most cross-border deals are still either to or from the US. China has emerged as the dominant net importer, followed by Sweden, Canada, the UK, India and France. For deals outside the US, cross-border participation has been the norm, while US-located deals have been almost exclusively domestic, involving a higher percent of international participation only after 2001. In the past few years, domestic VC and PE capacity has begun to emerge in many countries where it did not exist previously.

Catalyzing capital for Canada's life sciences industry

Canada's biotech sector ranks within the top five globally, but its life sciences venture capital (VC) industry is among the worlds weakest. This makes for an interesting case study in understanding the disconnect between low levels of VC and a healthy innovation ecosystem in terms of R&D spending, skilled workforce and enterprise support. Three key provinces (Quebec, Ontario and British Columbia) that have taken significantly different approaches to attracting VC are large enough to attract as much government investment as whole emerging markets. The aim of this article is to present evidence from a Canadian natural economic experiment in order to evaluate the effectiveness of varying government policies in attracting VC investment, to illustrate how these policies need tailoring to individual sub-sectors of the life sciences sector, and to highlight potential policy mechanisms that may be applicable beyond Canada's borders. We employ VC returns on investment (ROI) and exit data as a proxy for our evaluation. Our results suggest that government biotechnology investment needs to be structured end-to-end from early to late stage in order to be successful, that prevalence of private and international VC flows is critical for generating market efficiency, and that there is an ‘optimal’ efficient amount of capital before ROI result in diminishing returns.