Venture Capital Flows Research Articles

The pattern, evolution, and mechanism of venture capital flows in the Guangdong-Hong Kong-Macao Greater Bay Area, China

The pattern, evolution, and mechanism of venture capital flows in the Guangdong-Hong Kong-Macao Greater Bay Area, China

A new global division of labour in venture capital flows: Coupang’s IPO success at the New York Stock Exchange

ABSTRACT Coupang, which is an international spinoff of Softbank Vision Fund, chronicled a gargantuan IPO success at the New York Stock Exchange (NYSE) in 2021. Coupang is similar in many respects to Softbank’s earlier accomplishment with Alibaba’s IPO at the NYSE. By focusing on the success factors of the IPO at the NYSE and Coupang’s domestic business in South Korea, we advocate four propositions on the nature of global venture capital firms that try to link actual e-commerce markets in East Asia with the global centers of IPOs in the US. This study also deals with corporate governance in the new e-commerce sector, political risks and labor union militancy in a host country, predictors and contextual conditions of IPOs at the NYSE and the dual class system of shares and financial structures in a host country.

Екосистема стартапів в Європі: кращі практики та уроки для України

The scientific research paper examines the European experience in the development of startup ecosystems. The definitions of scientists of the concepts “startup” and “ecosystem of startups” are given. The importance of the development of the startup ecosystem for Ukraine and possible ways to find better solutions to strengthen such development are identified. Factors of internal influence on the startup ecosystem are analyzed, which include cultural (general business culture, history of successful business creation), social (human talent, investment capital, social networks, and mentors) and material, which has a specific geographical location (government agencies, universities, service companies, physical infrastructure, and open local markets). The structural components of the startup ecosystem are analyzed, their role in the functioning of the system and interconnections are revealed. The functioning of ecosystems of startups in Great Britain, Estonia, Germany, Switzerland, Sweden, and Finland are researched. The focus of the analysis was the structural elements of the startups ecosystem in these countries and their impact on the overall result. Statistics on venture capital flows, accelerators, and the total number of startups in leading European countries are analyzed. The main factors of successful functioning of the ecosystem of startups are revealed and the experience of European startup ecosystems are systematized. The Ukrainian ecosystem of startups is analyzed, their structural components and significant shortcomings that hinder its development are described. Weaknesses of the Ukrainian ecosystem of startups include lack of state support, insufficient funding, including due to international capital, underdeveloped infrastructure to support startups, lack of expertise and experience, the unfavorable investment climate and weak international ties. Possibilities and expediency of dissemination of European experience in the development of the Ukrainian ecosystem of startups is substantiated. Possible directions of application of the European experience of development of ecosystems of startups in Ukraine are substantiated. Three main steps have been proposed to strengthen the development of the Ukrainian ecosystem of startups based on European experience and in the context of Ukraine’s path to integration with the European Union.

What Is the Impact of Informal Entrepreneurship on Venture Capital Flows?

There has been a diverse range of research on the factors enabling informal entrepreneurship as well as the means to avoid or to eradicate its incidence. Several researchers argued that venture capital and financial flows, in general, contribute to economic growth and development. There have also been observations of how the investor level of trust in institutions facilitates investment decisions. This trust comes into play at the level of informal entrepreneurship and the ability of governments to control this type of entrepreneurship. Given that a great deal of research on this subject focuses its analysis on developing countries, we have chosen to investigate the reality of European countries precisely because of the scarcity of studies on the effect of informal entrepreneurship in this context. Our research aims to assess how informal entrepreneurship effects on venture capital flows. We use aggregated data at country level collected from a variety of sources, including the World Bank, Organization for Cooperation and Development and World Economic Forum, between 2006 and 2015 and 23 countries in Europe, corresponding to 230 observations (panel no. balanced). Through econometric estimation, which took place according to methodologies based on multiple regression models for panel data, the results demonstrate how informal entrepreneurship has a negative moderating effect between GDP and venture cUKapital flows. We intend to contribute to a better understanding of the effect of informal entrepreneurship on the flows of venture capital.

Mi Casa Es Tu Casa: Immigrant Entrepreneurs as Pathways to Foreign Venture Capital Investments

Venture Capital Firms are increasingly investing outside their home countries, however there is substantial heterogeneity among otherwise similar firms in the extent to which they invest abroad and the locations in which they choose to invest. Though prior research has identified factors such as institutional quality and cross-national connections through cultural, linguistic, or immigration based ties as being important drivers of the volume of cross country venture capital flows, it does not explain firm level heterogeneity in these choices. We propose that the degree to which venture capital firms invest in immigrant entrepreneurs in their home countries is an important differentiator in terms of their subsequent foreign investments. We show that investments by US VC firms in Indian immigrant entrepreneurs is associated with these firms making subsequent investments in India. We find no such effect for investments in non-immigrant entrepreneurs of Indian ethnicity (i.e. second and later generation immigrants). We also find a correspondence between the regional origins of these Indian immigrant entrepreneurs and the regions of India in which the VC firms subsequently invest. VC firms with Indian partners are more susceptible to these effects. The presence of immigrants as connectors in facilitating these investments also appears to limit the need for a local, i.e. Indian co-investment partner. Through these findings, the study contributes to research on global strategy, immigration and venture capital.

Risky business: Institutions vs. social networks in FDI

AbstractPolitical economy scholarship on foreign direct investment (FDI) emphasizes variation in host country political risk but overlooks variation in investors' sensitivity to political risk. We show that relational contracting, relationship‐based contract enforcement, is more efficient for high‐risk, human capital‐intensive activities for which the costs of writing legally enforceable contracts are prohibitive. We disaggregate FDI into two distinct varieties: mergers and acquisitions (M&A) and venture capital (VC). We propose that VC flows are less sensitive to host institutions but correlate strongly with skilled migrant networks that monitor compliance and impose reputational costs. Our empirical analysis of dyadic VC and M&A flows covers over 100 countries during 1980–2009. We address other mechanisms through which migrant networks facilitate FDI and verify our results hold at the country‐industry level. These findings suggest that relational contracting facilitates global integration of dynamic, knowledge‐intensive industries even when formal institutions are weak.

Deal or No Deal: Explaining the Rise of International Venture Capital Investment

Political economy accounts of economic integration strongly emphasize the importance of legal contract enforcement. We challenge extant research by showing that relational contracting, relationship-based contract enforcement, is more efficient for high-risk, human capital-intensive activities for which the costs of writing legally enforceable contracts are prohibitively high. We disaggregate foreign direct investment (FDI) into two distinct varieties: mergers and acquisitions (M&A) and venture capital (VC). We propose that VC flows are less sensitive to host institutions but correlate strongly with skilled migrant networks that monitor compliance and impose reputational costs. Our empirical analysis of dyadic VC and M&A flows covers over 100 countries during the 1980-2009 period. We control for other mechanisms through which migrant networks facilitate FDI and verify our results with industry-level analyses. These findings suggest that relational contracting facilitates global integration of dynamic, knowledge-intensive industries that are crucial to innovation, growth, and economic development.

Cyclicality, performance measurement, and cash flow liquidity in private equity

We study the liquidity properties of private equity cash flows using data from 837 buyout and venture capital funds from 1984 to 2010. Most cash flow variation at a point in time is diversifiable — either idiosyncratic to a given fund or explained by the fund’s age. Both capital calls and distributions also have a procyclical systematic component. Distributions are more sensitive than calls, implying procyclical aggregate net cash flows. A consequence is that the well-known finding that funds raised in hot markets underperform in absolute terms is sharply attenuated when comparing to public equities. Consistent with a liquidity premium for calling capital in bad times, we find that funds with a relatively high propensity to do so perform better in both absolute and relative terms. Venture capital cash flows and performance are considerably more cyclical than buyout, and the links between cyclical cash flows and performance are likewise stronger.

The rise of venture capital centres in China: A spatial and network analysis

Due to the importance of venture capital (VC) firms in spurring regional economic growth, the geography of VC firms and VC investments have attracted a lot of attention. However, the spatial patterns of cross-regional VC flows have rarely been explored, particularly in the context of emerging economies. Drawing on a unique dataset on VC firms and investments related to domestic initial public offerings (IPOs), this study combines location analysis with network analysis to investigate the spatial patterns of VC activities in China. The results confirm that Beijing, Shenzhen and Shanghai are the leading VC centres in the country. Although Yangtze Delta Area hosts the largest number of investments, Beijing and Shenzhen have a considerable advantage over Shanghai in terms of the number of VC firms, investments, and the number of domestic VC-backed IPOs. Beijing and Shenzhen also appear more central than Shanghai in China’s VC networks, with Beijing-Shenzhen representing the most important city-dyad in terms of VC investment flows. The article explains how the dynamics of the VC centres is embedded in China’s institutional and cultural context, critical to understanding the evolution and geography of China’s VC industry.

Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity

We study the liquidity properties of private equity cash flows using data from 837 buyout and venture capital funds from 1984-2010. Most cash flow variation at a point in time is diversifiable – either idiosyncratic to a given fund or explained by the fund’s age. Both capital calls and distributions also have a procyclical systematic component. Distributions are more sensitive than calls, implying procyclical aggregate net cash flows. A consequence is that the well-known finding that funds raised in hot markets underperform in absolute terms is sharply attenuated when comparing to public equities. Consistent with a liquidity premium for calling capital in bad times, we find that funds with a relatively high propensity to do so perform better in both absolute and relative terms. Venture capital cash flows and performance are considerably more cyclical than buyout, and the links between cyclical cash flows and performance are likewise stronger.

Determinants of Cross-Border Venture Capital Investments in Emerging and Developed Economies: The Effects of Relational and Institutional Trust

Frequent and open interaction between venture capitalists (VCs) and entrepreneurs is necessary for venture capital investments to occur. Increasingly, these investments are made across jurisdictions. The vast majority of these cross-border investments are carried out in a syndicate of two or more VCs, indicating the effects of intra-industry networks needing further analysis. Using China as a model, we provide a novel multidimensional framework to explain cross-border investments in innovative ventures across developed and emerging economies. By analyzing a unique international dataset, we examine worldwide venture capital investment flows from 2000–2012 and consider the effects of geographical, cultural, and institutional proximity as well as institutional and relational trust. We find trust to mitigate the negative effects of geographical and cultural distance, where institutional trust is more relevant for investments in emerging economies, and relational trust is more relevant for investments in developed economies.

Venture Capital and Internationalization

Cross-border investments represent a substantial share of venture capital activities. We use a comprehensive dataset on investments worldwide to analyze the internationalization of venture capital financing. We postulate that cross-border activity is shaped by macroeconomic factors in the venture capitalists’ and the portfolio companies’ countries, as well as characteristics of the venture capitalists and the deals, which likely affect the costs and benefits of investing abroad. In order to analyze how country-specific, venture capitalist-specific and deal-specific factors affect cross-border activity, we use the country, venture capitalist and portfolio company perspectives. Our results suggest that factors capturing the benefits and costs of investing abroad determine international venture capital flows.

Institutional Distance and Cross‐Border Venture Capital Investment Flows

Cross‐border investments are an increasingly important part of venture capitalists' portfolios. In order to better understand venture capitalists' international investment decisions, we use dyadic pairings of uropean countries over a 10‐year time span to examine how regulative, normative, and cultural‐cognitive institutional differences are related to cross‐border venture capital investment flows. Results demonstrate that increased normative and cultural‐cognitive distance reduce cross‐border investments, whereas regulative distance shows no relationship. Together, these findings suggest that institutional dimensions do influence venture capital investment decisions and that the type of distance can have differing effects.

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.

Economic and capital market antecedents of venture capital commitments (1960–2010)

Using vector autoregression technique, we examine the interrelation between venture capital flows, economic development, capital market fund-raising activities, and capital market valuation, based on annual data of the United States over the past half-century. We find that venture capital commitments appear to be correlated with GDP and capital market valuation. While capital market fund-raising activities (Initial Public Offerings and Seasoned Equity Offerings) are also correlated with venture capital flows, these effects are subsumed by GDP, indicating that the overall economy drives both venture capital flows and capital market financing activities. Analyses from impulse response functions suggest that shocks to GDP have a permanent effect on venture capital flows, while the impact of capital market valuation (Standard & Poor 500 returns) on venture capital flows is rather short lived. Overall, both economy-wide development and financial market fluctuations seem to impact venture capital flows.

Cross-border venture capital flows and local ties: Evidence from developed countries

Abstract Using a unique global dataset from developed countries, this paper provides evidence that not only traditional determinants of international capital flows affect cross-border venture capital flows, but that ties among local venture capital investors are related to size and style of these flows. Our results on size indicate that both number and value of cross-border flows between two countries increase with tie intensities within the local venture capital industries in both countries. Our results on style suggest that strong local ties go hand in hand with more intensive ties to foreign investors. Thus, rather than protecting the local market and fending off competition from foreign investors, local tie intensity seems to stimulate international syndication and expansion of venture capital financing across borders, which allows venture capital investors to build geographically diversified portfolios and to add value by building cross-border syndicates. These effects seem to be stronger for those foreign investors who already have experience in the particular destination country.

Venture capital and internationalization

Cross-border investments represent a substantial share of venture capital activities. We use a comprehensive dataset on investments worldwide to analyze the internationalization of venture capital financing. We postulate that cross-border activity is shaped by macroeconomic factors in the venture capitalists’ and the portfolio companies’ countries, as well as characteristics of the venture capitalists and the deals, which likely affect the costs and benefits of investing abroad. In order to analyze how country-specific, venture capitalist-specific and deal-specific factors affect cross-border activity, we use the country, venture capitalist and portfolio company perspectives. Our results suggest that factors capturing the benefits and costs of investing abroad determine international venture capital flows.

Spiky globalization of venture capital investments: the influence of prior human networks

AbstractWe demonstrate a spiky globalization pattern in the cross‐border spread of venture capital: rather than being uniformly distributed, cross‐border venture capital flows are unevenly distributed, in that certain regions of the U.S. display particularly intense linkages with certain foreign nations. We posit that such spiky globalization of venture capital is driven by the spiky globalization pattern of prior human networks between locations, and we provide empirical results supportive of our hypothesis. Specifically, we reason that immigrant entrepreneurs inherently tend to collocate with each other in their host nation, thus advantaging certain regions in the competition to act as sources and destinations of cross‐border venture capital. This study sheds new light on geographical patterns in international venture capital and entrepreneurship. Copyright © 2010 Strategic Management Society.

Letter from the Editor-in-Chief: The how and the impacts of going international

Journal of International Business Studies (2009) 40, 1239–1240. doi:10.1057/jibs.2009.53 This issue of JIBS consists of eight articles, seven of which were originally submitted under former Editor-in-Chief Arie Y. Lewin and then transferred to my editorial team, and a research note. Three topics are covered under the general research question of the how and the impacts of going international: international entrepreneurship, cross-border acquisitions and cultural/human resource management (HRM) implications of going international. Entrepreneurship has been defined as the identification and exploitation of previously unexploited opportunities. Often, additional funding is needed to bring new opportunities to market, so entrepreneurs turn to venture capitalists. Scholars tend to think of venture capitalists as local firms that provide financing for new businesses (e.g., through loans, angel investors and initial public offerings (IPOs)). However, ‘‘Understanding global flows of venture capital: Human networks as the ‘carrier wave’ of globalization,’’ by Madhavan and Iriyama argues that venture capital has now become a cross-border activity. The authors contend that industry drivers for globalization are both economic and network based. Economic pressures cause venture capital to be drawn to large economies and correlated with cross-border investment flows. Socio-cultural drivers are generated by transnational technical communities that form a ‘‘community of practice,’’ creating intensive, trust-laded interactions that facilitate cross-border venture capital flows. Examining US outbound venture capital flows for 1982–2002, the authors find support for both the economic and network arguments. One of the major activities of venture capitalists is helping entrepreneurs launch an IPO. An IPO can be a springboard for rapid internationalization of sales by the newly listed firm. ‘‘R&D, internationalization and growth of newly listed firms: European evidence’’ by Filatotchev and Piesse investigates the growth of foreign sales by newly listed firms in the UK, Germany, Italy and France during 1985–2004. The authors find that R&D intensity is positively correlated with internationalization of newly listed firms. Both R&D and export intensities are positively related to overall sales growth. The next three articles examine cross-border acquisitions. Chari and Chang in ‘‘Determinants of the share of equity sought in cross-border acquisitions’’ argue that foreign firms will seek a lower equity share if the acquisition involves adverse selection hazards in valuation, post-acquisition costs related to cultural distance, unbundling costs of selling non-desired assets and the real-options Journal of International Business Studies 40, 1239–1240 & 2009 Academy of International Business All rights reserved 0047-2506

Understanding global flows of venture capital: Human networks as the “carrier wave” of globalization

Industry participants and observers view venture capital as fundamentally a local business. However, recent data show an increasing share of US venture capital investments flowing overseas. We suggest that cross-border venture capital flows are associated with the formation of “transnational technical communities” (TTCs), groups of immigrants active in both home- and host-country technical networks. Our results highlight the role of human networks as a mechanism of industry globalization, and support the view that TTCs are emerging economic actors in their own right.