Do Local and International Venture Capitalists Play Well Together? Venture Capital Investments and the Development of Venture Capital Markets

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 venture capitalists. We control for the potential endogenous participation and syndication by international VCs using instrumental variables analyses and a natural experiment 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 between countries as an exogenous change in effective proximity, we find that entrepreneurial firms backed by international VCs are more successful when travel becomes easier between the two countries. 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. *Professor of Finance, Fulton Hall 440, Carroll School of Management, Boston College, Chestnut Hill, MA 02467, Tel: (617) 552-3980, Fax: (617) 552-0431, email: chemmanu@bc.edu **Assistant Professor of Finance, Helleveien 30, Norwegian School of Economics (NHH), 5045 Bergen, Norway, Tel: (47) 5595 9802, email: tyler.hull@nhh.no ***Assistant Professor of Finance and Thomas Moore Faculty Fellow, 414C Hayden Hall, D’Amore-McKim of Business, Northeastern University, Boston, MA 02115, Tel: (617) 3734707, email: k.krishnan@neu.edu We would like to thank the editor, Gavin Cassar, and three anonymous referees for helpful comments and suggestions that have helped to significantly improve the paper. We also thank the Center for Emerging Markets at Northeastern University for supporting this research. Thomas Chemmanur would like to acknowledge support from the Boston College summer research grant. For helpful comments and discussions, we thank Josh Lerner, Antoinette Schoar, David Sraer, Malcolm Baker, Michael Ewens, Matthew Rhodes-Kropf, Debarshi Nandy, Ravi Ramamurti, Tunde Kovacs, Pegaret Pichler, Laarni Bulan, Blake LeBaron, Carol Osler, and Catherine Mann and seminar participants at Brandeis University, Northeastern University, RPI, the 2012 NBER Changing Financing Market for Innovation and Entrepreneurship pre-conference, the 2012 American Finance Association annual meetings and the 2011 Entrepreneurial Finance and Innovation Conference. Any errors and omissions are the responsibility of the authors. 1 ·Executive Summary International investments by venture capitalists (VCs) have received significant attention in the literature in recent years. VCs choosing to invest in foreign markets face significant monitoring costs due to differences in context, culture, and geographic proximity between their home country and the country of the entrepreneurial firm (Li et al. 2014; Guler and Guillen, 2010). It is thus important to understand VC cross-border syndication choices that might help them take advantage of complementarities with local VCs as well as the factors affecting the success of such cross-border investments. International venture capitalists are likely to have considerable expertise in helping entrepreneurial firms to become successful. However, international venture capitalists may lack knowledge of the local product markets of the entrepreneurial firms they invest in and may face significant costs in monitoring these firms. The above disadvantages may be exacerbated when the distance between their home country and that of these entrepreneurial firms is greater. International venture capitalists can overcome these disadvantages by syndicating with local VCs and taking advantage of their complementary skills (consistent with Lerner, 1994; Brander et al., 2002). We find that firms backed by syndicates consisting of both international and local VCs are most likely to exit successfully. Further, using instrumental variable analyses and a natural experiment, we show that international VCs have a positive and causal effect on exit. Geographic distance between the VC’s country and that entrepreneurial firm’s country increases the likelihood of local-international syndication. Greater geographic distance lowers the likelihood of successful exit, and this effect is mitigated by local-international syndication. The positive impact of local-international syndication is also apparent in the higher post-IPO operating performance of portfolio companies. Finally, greater ease of travel between the VC firm’s country and that of the entrepreneurial firm increases the likelihood of successful exit. Our results indicate that both expertise in venture capital investing and knowledge of