VENTURE CAPITAL INVESTMENT AND FIRM PERFORMANCE: A SPATIALLY INFORMED SOCIAL NETWORK APPROACH (SUMMARY)

Venture Capital Investment and Firm Performance: A Spatially-informed Social Network Approach Katja Bringmann (University of Antwerp, start of PhD 24 June 2012, expected final date December 2015, katja.bringmann@uantwerpen.be) Ann Verhetsel (University of Antwerp, supervisor) State-of-the-art and theoretical arguments Relational ties and network status, in contrast to armâ? s length transactions, are central to many financial activities. In this study we bring together social network theory and a resource-based view on firm performance by investigating if structural as well as spatial differentiations of venture capital [VC] investors in syndication networks imprint on the early growth prospects of their portfolio firms. Starting businesses often face problems collectively referred to as â? liability of newnessâ? •, describing the dearth of internal resources such as strategic assets, legitimacy, organizational structure, and funding. In this context, social networks are regarded as an external avenue to source lacking knowledge and skills important for the survival and growth of firms. Prior research indicates that venture capitalists get actively involved in the development of their portfolio company, consequently we hypothesize that they function as important transmitters of social capital and external network resources towards their portfolio companies. Many social networks are characterized by an asymmetric interconnectedness of nodes. If we regard relational ties as channels to transfer information, those actors that possess a higher social status in form of a higher quantity or better quality of linkages are supposed to enjoy better access to the circulating knowledge than actors inheriting a relatively peripheral position. To determine opportunities to tap information flows, it is therefore suggested to look more closely at the structural position of actors in a network. With respect to VC activity, albeit a tremendous rise in cross-border VC investments during the past years, causing an acceleration in the globalization of co-investment networks, ambiguity still exists with respect to performance consequences resulting from VC investorsâ? global integration. Related studies have exclusively focused on domestic syndication networks of VC investors, the impact on venture performance of investorsâ? integration in co-investment networks that transcend the domestic playing field remains nevertheless still largely unknown. The aim of this paper is therefore to explore performance consequences resulting from differences in both the structural integration of VC investors in syndication networks and the geographical scope of these network ties. Research gap By linking a resource-based view, insights from regional economics on the role of geography for knowledge flows, and social capital theory in the context of VC investment, the study contributes to the existing entrepreneurship literature in various ways. To our knowledge, this is the first exploratory study that looks, in addition to domestic co-investment ties, at cross-border syndication networks in a systematic way. Using longitudinal data on early growth performance-related variables at the firm level, the analysis also leads to a better understanding of growth trajectories of portfolio firms prior to exit. Concentrating on Belgian VC deals, implications of investorsâ? network status on portfolio firm performance were assessed for a relatively small and still developing VC market. Data and Method The effect of VC investorsâ? network status and geographical network position on the early growth performance (first three years after the initial VC round) of ventures is tested using longitudinal data on 64 Belgian portfolio firms and their domestic as well as international VC providers. The dataset comprises Belgian target firms that received initial VC funding between 2001 and 2008 and has been retrieved from the Zephyr database (Bureau van Dijk). Financial statement data provided by the National Bank of Belgium were consulted for information on target firm performance. This resulted in a unique dataset on growth performance related ciphers including employment and sales growth of young venture-backed firms in Belgium. To construct and analyze structural and spatial features of VC co-investment networks, graph theory is applied. Networks are based on dynamic adjacency matrices that are traced over time using 4-year windows with as starting point the year foregoing the year of the initial VC injection. The forwarded hypotheses on the relation between network attributes and portfolio firm performance were consequently analyzed employing multilevel models of change. Robustness of results is ensured with respect to the normal distribution of variables and different error structures including first order autocorrelation and heteroscedasticity. Different tests were performed to foreclose reverse causality. All calculations were undertaken in the statistical software program R using the NLME package to model growth curves and the igraph package for the computation of network attributes. Results The study departs from a customary neoclassical understanding of finance and provides a sociological as well as geographically-informed understanding of VC activity. Applying a multilevel framework on longitudinal growth data of Belgian VC investors and their syndication partners, we find that both VC investorsâ? local and cross-border network embeddedness impacts venture performance. The results of the study suggest that inter-firm relational ties and, particularly, cross-border linkages (1) are important channels for the transfer of information and knowledge and (2) expand the resource-base of a portfolio firm. Despite distance-constraints with respect to the transmission of tacit knowledge resources, particularly international relational ties are found to be beneficial for headcount growth which is associated with their role as crucial sources of non-redundant information and innovation-triggering knowledge.