This is a practical review of “Do local and international venture capitalists play well together? The complementarity of local and international venture capitalists” published in Journal of Business Venturing, Issue 31 (2016), pp. 573-594 — by Thomas J. Chemmanur, Tyler J. Hull, and Karthik Krishnan.
This study examines cross-border venture capital investments into emerging (= mostly developing) and developed nations. As an example, the authors categorize (using the World Bank’s categorization) Poland and Thailand as emerging, and Czech Republic and Singapore as developed (in addition to most western European countries). US is excluded from the sample due to significant differences in maturity and scale of VC activity, compared to the rest of the world. So, it would be fair to say that the study focuses on the world — sans US.
The main finding of the paper is that ventures receiving investments from VC syndicates that involve local (domestic) and international VC firms achieve better exits and post-IPO operating performances, compared to local VC only and international VC only investments. The authors also find that easier travel and/or close proximity facilitates this effect. (In their own words, the authors find that “international VCs that are farther away are less successful than international VCs that are closer to their investments” p.589.) So, as is the case for angel investing, distance matters for international VC investing too.
The reason for this effect, the authors argue, is that due to legal, cultural, institutional, and simply physical distance, international VCs are at a disadvantage when investing in ventures in a foreign country. Better communication and especially better travel make them more effective in improving their ventures’ performance. To assert these findings, the authors conduct several analytical remedies and try to rule out alternative explanations through such methods as using instrumental variables, conducting various robustness checks, and using several control variables (e.g. target country GDP, target country VC market maturity and stock market maturity).
One methodological concern, at least for me, is that the sample is skewed toward Indian (48%) and Chinese (18%) ventures. About a third of the sampled ventures come from twelve countries, whereas two thirds of the sampled ventures are from India and China. I would have preferred to have a less imbalanced sample, but I guess that is representative of the venture activity across the globe. (Compared to 12 ventures in Vietnam and 15 in Argentina, there were 324 in China and 844 in India, in the sample.)
Another methodological concern is the authors’ proxying `local` with the existence of a country office of a VC firm in a given country. For example, if a Belgian VC firm has an office in Croatia and investing in Croatian ventures, this VC firm is considered `local`. This might be accurate for some VC firms that have sufficient presence and engagement with the local entrepreneurial ecosystem, however I can imagine some VCs that have a local office but insufficient local human capital and/or dysfunctional operations that hamper their engagement with the local environment. Such problems would decrease the extent to which the VC firm is `local`. In this respect, an interesting question arises: What does it actually mean to be `local`? Are local human capital abroad (e.g. Croatian expat VC managers living in Belgium but investing in Croatia) less local than Belgian expats of the same VC firm living and investing in Croatia? Can frequent travel offset handicaps of distance? Would Skype or GoToMeeting help? 🙂 What is the essence of the knowledge and interaction that a VC provides to add value to a local venture?
While there are many unanswered questions, a practical takeaway lesson from the paper for international VCs is to look for local partners or consider maintaining a strong and engaged organic presence in the target country, to achieve successful investment outcomes. Maybe the former for pop-up opportunities and the latter for strategic target countries. This is probably not news to practitioners, but this paper provides some robust data to back up the practical experience. [P.S.: JBV, the journal in which this article was published, is the peer-reviewed academic entrepreneurship journal with the highest impact and reputation.]
Screening the entrepreneurs and evaluating their ventures for initial investment is getting easier for both domestic and international VCs with developing technological infrastructure and ease of travel. However, the journey of a venture is long. Keeping up with the pace of growth of the venture and providing value added through advising and networking effects become harder with distance and over time. Local partners can help.
This is the first review of an academic paper on entrepreneurial finance that I am posting here. I intend to do more reviews like this. Let me know what you like and do not like in them to get better ones in the future.