US Venture Research Articles

Diversification over time: a dynamic approach of diversification in the US venture capital industry

Diversification over time: a dynamic approach of diversification in the US venture capital industry

Australian initial public offerings and US venture capital: different structures for similar early-stage funding?

PurposeAustralian Securities Exchange (ASX) initial public offerings (IPOs) are an important source of early-stage capital and have also driven a substantial increase in main-board listed companies post-millennium. By contrast, Australian venture capital (VC) funding has remained largely dormant. The opposite has occurred in the US: IPOs have fallen by half, and VC funding has surged. The authors examine the reason for this divergence between ASX IPO and US VC systems that, with their supporting ecosystems, have many features in common and function similarly. The authors explore the potential factors that could explain the US VC surge vis-à-vis Australia's VC stagnation.Design/methodology/approachThe authors’ analysis is predominantly qualitative. The authors describe the Australian listing process and its similar features and functions as for the prototypical VC. The authors also describe the developments in US VC driving its recent exceptional surge and highlight that such developments have not yet materialised on the Australian scene, where early-stage IPOs have served as a substitute.FindingsThe ASX's structure and ecosystem have been critical to its success in fostering early-stage main-board listings. While the US has succeeded in alternatively growing VC, there is an increasing concern that the latter has occurred partially because valuations are stretched, tax concessions for carried-interest capital gains are too high and corporate control benefits are becoming increasingly diluted. These developments could have important implications for Australia, where VC structures are currently being reviewed.Originality/valueTo the best of the authors’ knowledge, no prior study has attempted to bridge the broad differences in IPO and VC funding trends for early-stage companies in Australia and the USA.

University venture capital in big data, regional and historical perspective: where and why has it arisen?

ABSTRACT This article contributes to the international comparative analysis of university venture capital (UVC), providing a quasi-experimental design for follow-up research and practice. The US venture capital industry, with its unicorn focused high-growth format opened up a venture capital gap. UVC transmutes academic innovation into high-tech firms, industries and regional renewal, filling interstitial funding gaps among angel, public and private venture capital offers. It is a knowledge-based industrial policy by Another Name, with direct/explicit and indirect/implicit versions, on a continuum with variation depending upon shifting ideological and competitive concerns. Beyond as of right “womb” provision, UVC capstones an academic innovation ecosystem of technology transfer, incubation and acceleration, translational research, proof of concept funds and entrepreneurship education. Venture capital, exemplified by Sand Hill Road, de-emphasizes classic regional development objectives, neglecting appropriability conditions such as academic and regional circumstances that UK and China prioritize. More modest firm formation outcomes are dismissed as failures, with entrepreneurs encouraged to return to the entrepreneurial churn. We examine the origin and development of UVC from macro, meso and micro, historical and comparative perspectives. Multi-method/multi-sample, comparative case study, and big data analytics show the constraint, variety, and early affinity of UVC to academic icons with significant untapped potential to inspire widespread economic and social advance.

Effects of Venture Capital Mega-Deals on IPO Success and Post-IPO Performance

Venture capital financing rounds with transaction volumes of 100 million US dollars or more have become an integral part of the US venture capital market within the last decade. We aim to determine whether such mega-deals are a quality signal for equity investors in the event of an IPO. Based on a sample of 364 US IPOs, we find that companies that have received a venture capital mega-deal perform, on average, superior IPOs and exhibit favorable post-IPO performance.

Reducing National Tribalism Through Conciliatory Collaborative First Moves

Despite opportunities to choose among prospective collaborators from across the globe, firms may remain partial to those who share their nationality. We explore the notion of national tribalism in the context of venture capital funding in China and whether such tribalism can be diminished through conciliatory collaborative first moves. Based on the composition of the investment syndicates that they assembled between 1998 and 2017, both Chinese and US venture capital firms favored partnering with fellow compatriot firms over comparable non-compatriots. We find, however, such tribalism to be particularly strong among Chinese firms. More critically, we find that, when a Chinese firm makes a conciliatory first move by initially including a US firm in an investment syndicate, not only is the focal US firm inclined to reciprocate the focal Chinese firm when it subsequently assembles investment syndicates, but also the US firm is no longer partial to partnering with comparably familiar US firms over the focal Chinese firm. In effect, conciliatory first moves made by Chinese firms reduced US tribalism. We fail to find, however, similar dynamics among Chinese venture capital firms. Chinese national tribalism was resilient to conciliatory collaborative first moves made by US firms.

Venture Capital Networks in Southeast Asia: Network characteristics and cohesive subgroups

Venture capital firms (VC) have encountered with uncertainty and risk of asymmetric information due to an investment in early-to-growth stage start-ups with technological base and high growth potential. Venture capital syndication network helps reduce a broad gap of information asymmetry in a venture capital investment. Moreover, 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. Despite a decline in the number of venture deals in the US, the deals keep surging in Southeast Asia (SEA), one of the most significant and dynamic propellers of the world economy. To develop the entrepreneurial ecosystem in SEA, it is interesting to examine how VC firms are connected to one another. Even though several literatures found some distinctive network characteristics amidst the US, European and Chinese venture capital market, the Southeast Asian has left unattended. In this paper, we initiate the network of venture capital firms among Southeast Asian nations and explore their relationships through social network analysis. The purposes of this study are to investigate the topological and statistical properties of VC network consisting of small-world behavior, power law distribution, and centrality measure such as degree, closeness, and betweenness. In addition, we classify various levels of connections into subnetworks and examine influential groups of VCs in Southeast Asia.We initiate an empirical study on the characteristics of VC network across different countries in Southeast Asia by using a unique hand-collected dataset of syndicated deals. Social network analysis has initially and preliminarily been applied to the VC network in this region. This paper contributes to VC network literature in providing a unique network structure and network metrics of venture capital in SEA. In managerial contribution, this study provides more structural VC cooperation towards VC syndication networks. This benefits to venture capital firms who are looking for potential partners in Southeast Asian region and start-up companies who are looking for funding with high-networked or influencial VCs. The results also confirm previous evidence of significance on VC networks in emerging market, even if the institution and regulation are claimed to fall behind that in the developed market. This research introduces the fact that the venture capital network in Southeast Asia has small-world pattern and Singapore acts as a hub of venture capital market in the region. Top-ranking VC firms have been listed by network centrality across nations, while multi-company syndications are prevailing in Southeast Asia.

The dynamics of organizational reputation and status: momentum and volatility

PurposeOrganizational reputation and status are similar yet distinct constructs, serving as signals conveying information about an organization and its products and thus constituting audiences' perceptions about the organization. However, compared to status, reputation tends to change more dynamically over time. In this study, the authors argue that the dynamic traits of reputation – particularly, its momentum and volatility – may serve as additional signals and/or noises, influencing potential exchange partners' perception about the organization and thereby determining its status.Design/methodology/approachThe authors test our hypotheses in the context of the US venture capital firms between 1990 and 2010. The authors collected 8,793 firm-year observations of 1,186 VC firms and used the Arellano–Bover/Blundell–Bond dynamic panel estimation method to estimate their model.FindingsThe authors’ findings show that reputation momentum has a positive effect on status, whereas reputation volatility does not have a significant direct effect. However, the authors found that volatility has indirect effects on status, serving as a noise weakening the signaling effects of reputation and its momentum.Originality/valueThis paper contributes to the literature on organizational reputation and status by suggesting the importance of considering the dynamic traits of organizational reputation, which are indeed the crucial factors that distinguish reputation from status. Also, this study provides managerial implications for the organizations that aim to enhance their status through managing their reputation.

The effects of status on the performance of portfolio diversification strategies

PurposeThis paper investigates how a firm's status moderates the performance of its investment portfolio diversification strategy. We combine the investment diversification literature with the organizational status theory, arguing that status would weaken the benefits of a specialist strategy in their niche industry of investments while strengthening the positive consequences of a generalist strategy across various industries.Design/methodology/approachWe collected our data using the Securities Data Company (SDC) Platinum VentureXpert database. A fixed-effects spline regression analysis for 2,201 US venture capital firms between 1969 and 2016 was used to test for a nonlinear relationship between the level of portfolio diversification and firm performance.FindingsWe found that status differences exist in the performance of a specialist strategy but not in that of a generalist strategy. Our results indicate that portfolio specialization in fewer number of industries has little impact on low-status firms, whereas high-status firms suffer significantly lower IPO success rates. In contrast, above-median portfolio diversification was found to be beneficial to both high- and low-status firms.Originality/valueWe specifically identify the impact of status on the performance of investment diversification strategies, an area of research which has received little attention. Further, our findings provide some practical implications for managers making investment decisions between specialist and generalist investment strategies, given their status within the market. Implications for understanding the roles of firm status in portfolio diversification strategies are discussed.

Quadratic hedging strategies for private equity fund payment streams

To better understand the relation between public markets and private equity, we consider quadratic hedging strategies to replicate the typical payment stream pattern associated with private equity funds by traded factors. Our methodology is inspired by the risk-minimization framework developed in financial mathematics and applies the componentwise L2 Boosting machine learning technique to empirically identify feasible replication strategies. The application to US venture capital fund data further draws on a stability selection procedure to enhance model sparsity. Interestingly a natural connection to the famous Kaplan and Schoar (2005) public market equivalent approach can be established.

Foreign Investors and Domestic Company Growth: Evidence From US Venture Capital Investments in Sweden

Do foreign venture capitalists help the domestic economy, or hamper it by slowing down growth, potentially moving economic activity away? This paper addresses this long-standing policy question by examining the differential effects of US venture capital investments on the growth of Swedish start-up companies. It finds that US venture capital results in more employment, not less. These findings continue to hold after controlling for endogenous selection effects. US investments are also accompanied by increases in local employment and start-up rates. The paper also examines effect on wages, sales, earnings, foreign subsidiaries, subsequent funding rounds, and exits. Overall there is no evidence that US venture capital investments hamper the domestic growth of Swedish companies.

Venture Capital Networks in Southeast Asia: Network Characteristics and Cohesive Subgroups

Venture capital firms (VC) have encountered with uncertainty and risk of asymmetric information due to an investment in early-to-growth stage start-ups with technology-based and high growing potential. Venture capital syndication network helps reduce a broad gap of information asymmetry in a venture capital investment. Moreover, 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. Despite a decline in the number of venture deals in the US, the deals keep surging in Southeast Asia (SEA), one of the most significant and dynamic propellers of the world economy. To develop the entrepreneurial ecosystem in SEA, it is interesting to examine how VC firms are connected to one another. Even though several literatures found some distinctive network characteristics amidst the US, European and Chinese venture capital market, the Southeast Asian has left unattended. In this paper, we initiate the network of venture capital firms among Southeast Asian nations and explore its relationship through social network analysis. The purposes of this study are to investigate the topological and statistical properties of VC network consisting of small-world behavior, power law distribution, centrality measure such as degree, closeness, and betweenness. In addition, we diversify different levels of connection into subnetwork and examine the influential groups of VCs in Southeast Asia. We initiate the empirical study on the characteristics of VC network across different countries in Southeast Asia using the unique hand-collected dataset of syndicated deals. Social network analysis has initially and preliminarily been applied to the VC network in this region. This paper contributes to VC network literature in providing a unique network structure and network metrics of venture capital in SEA. In managerial contribution, this study provides more structural VC cooperation towards the government and cooperates, who can facilitate more open innovation practices to create a better open environment and innovation ecosystem among accelerators, investors, and startup companies (including SMEs). The results also confirm previous evidence of significance on networks in emerging market that there is a presence of a strong venture capital network in this region, even if the institution and regulation are claimed to fall behind that in the developed region. This research introduces the fact that the venture capital network in Southeast Asia has small-world pattern and Singapore acts as a hub of venture capital market in the region. Topranking VC firms have been listed by network centrality across nations. Multi-company syndication is prevailing in Southeast Asia.

Getting Tired of Your Friends: The Dynamics of Venture Capital Relationships

Does doing more deals together always strengthen investor relationships? Based on the relationships of the top 50 US venture capital firms, this paper focuses on the strengths of relationships and their dynamic evolution. Empirical estimates indicate that having a deeper relationship leads to fewer, not more future coinvestments. Moreover, deeper relationships lead to lower exit performance, even after controlling for endogeneity. Interestingly, deeper relationships first lead to lower performance, and subsequently lead to a slowdown in the relationship intensity. Relationship effects are more negative for VC firms with less central network positions, and for deals made in “hot” investment markets.

Foreign Investors and Domestic Company Growth: Evidence from US Venture Capital Investments in Sweden

Foreign Investors and Domestic Company Growth: Evidence from US Venture Capital Investments in Sweden

Mechanisms for Network Emergence:The Case of US Venture Capital

Cooperative networks are important for firm performance but how do networks form? Mechanisms identified in the literature for forming new cooperative ties typically assume the prior existence of th...

Further evidence on the geographical concentration of venture capital investments

This study provides an alternative examination into the dynamics of US venture capital investments across different geographical markets. A simple concentration index is developed to measure the size of venture capital investments by region relative to the US total venture capital investments. The time-series properties of this concentration index are examined; in particular, a series of unit root tests are employed to examine whether shocks to the index are temporary. Findings indicate that the geographical concentration of venture capital is increasing over time but shocks are temporary.

Entrepreneurship and the Business Cycle: Stylized Facts from US Venture Capital Activity

We consider US Venture Capital (VC) activity as a measure of entrepreneurship and study its relationship with the business cycle. This measure addresses some biases in alternative measures such as self-employment and business ownership that have been considered in previous literature. Despite the well-known volatility in VC activity, it remains an important source of funding for entrepreneurs engaging in innovative business creation. We document key stylized facts for VC entry (seed and start-up stage) and VC exit (late stage) at the aggregate and sectoral level. VC entry is more strongly correlated and is contemporaneous with the business cycle while VC exit lags the cycle by two quarters. There is strong evidence for a bi-directional causality between entrepreneurship and economic activity. A positive shock to VC activity has a positive effect on real GDP. Our findings can help inform policies designed to support entrepreneurship.

Extra-and Intra-Alliance Behavioral Moderators of Success in Alliances with Competitors

This study examines the relationship between the degree of competition among alliance members and alliance success. Adopting the competitive tension perspective on alliances we examine how several extra- and intra-alliance behavioral factors moderate this relationship in the context of US venture capital syndicates. We find that competitive similarity of partners decreases chances of alliance success, but performance below historical and social aspiration levels, higher relative “weight” of alliance, and social proximity of alliance members to other firms in the industry attenuate this effect and can act as switches of collaborative success. We also find that relational embeddedness of competitors and presence of distinct alliance leadership positively affect success of alliances with competitors.

Host country network, industry experience, and international alliance formation: Evidence from the venture capital industry

Integrating resource dependence and social network theories, we investigate how foreign firms’ position in alliance network in host country influences their further allying with firms from the host and home countries. We introduce network centrality as a factor that influences two competing forces in alliance formation: willingness and attractiveness. Furthermore, we argue that foreign firms suffering from a low network centrality may find it easier to enhance their network position if they have industry experience. Our analysis of data on US venture capital firms’ investment in China supports our theoretical framework. Theoretical and managerial implications of our findings are discussed.

Orchestrating policy ideas: philanthropies and think tanks in US education policy advocacy networks

While think tanks are a global phenomenon, their role in shaping US policy offers an instructive example of think tank influence on policymaking due to the immensity of resources directed towards those ends, with education policy serving as a prime example. Focusing on a distinct set of “incentivist” education policies, this analysis describes the think tank-philanthropy linkage in US education policymaking. We offer examples of how philanthropists provide financial, empirical and political resources to advance think tanks’ policy ideas through advocacy networks; describe the multiple functions performed through advocacy networks of intermediary organisations, noting the diffusion of form and function around tasks such as knowledge production, political and media support; and we highlight the ways in which US venture philanthropists and think tanks connect around “idea orchestration” in order to advance ideas in policy processes. We suggest that, especially in the realm of incentivist policies, think tanks do not appear to produce or incubate but rather promote ideas, and actually often only a single idea. The concluding discussion considers advantages evident in idea orchestration and the implications of private control of public policymaking.

Location Specific Styles and US Venture Capital Contracting

This paper shows that several contractual equilibria coexist in the US venture capital (VC) contracts. Our database is larger than that of previous studies and includes 1,804 contracts. Our main finding is that California-based entrepreneurs receive less harsh contract terms. In particular, investors subject to California-based or California style contracts have less downside protection. This “California effect” remains large and significant even after we include all the previously discovered controls which determine contract design. We find a similar effect if the VC is located in California, or if a non-California VC had a large exposure to the California market. We do not find evidence that VCs are substituting cash flow contingencies for control rights or for performance-based CEO compensation contracts. We also document several other new contractual features of VC contracts. In particular, we find that better companies and more experienced VCs receive better contract terms, whereas older companies receive harsher contracts. We also confirm the role of concentration and proximity in financial contracts.