Geographical and Institutional Distances in Venture Capital Deals: How Syndication and Experience Drive Internationalization Patterns

In the last decade, more than one third of worldwide venture capital investments have been crossborder deals. In many of these deals venture capitalists cross continents and/or invest in countries with different legal systems and cultural institutions. Drawing on a novel dataset of worldwide venture capital deals, we investigate how venture capitalists overcome the complexity of investing in geographically and institutionally distant regions. Our results suggest that syndication with local venture capitalists reduces foreign venture capitalists' obstacles arising from lacking geographical and institutional proximity to the portfolio company as well as offsets their lacking general and withincountry experience. In addition, our findings indicate that repeated relationships between foreign and local venture capitalists are able to reduce potential frictions which may arise between syndication partners over short as well as over long geographical distances. We find that internationalization is not only an issue for a handful of large experienced global venture capitalists jetting across continents. It is not the case that smaller, less experienced venture capitalists are not able to exploit the potential advantages stemming from internationalization. Our results indicate that experienced local venture capitalists invite experienced foreign partners, while inexperienced local venture capitalists invite less experienced foreign ones. Consequently, syndication with an inexperienced local venture capitalist may be a successful way for inexperienced foreign venture capitalists to overcome the obstacles of geographical and institutional distances. This result of our analysis is of particular relevance for venture capitalists with small experience who want to expand their activities beyond their countries' borders but who do not (yet) have direct access to deals in foreign countries. These investors may start their international expansion via syndication with inexperienced local venture capitalists in small deals. In the course of time, as they become more and more experienced and possess better contacts to other venture capitalists through repeated interactions, they may not only gain access to cross-border deals on their own but they may also be able to invest in larger deals and to join cross-border syndicates led by more experienced venture capitalists.

Tykvova, Tereza and Andrea Schertler (2011), Geographical and Institutional Distances in Venture Capital Deals: How Syndication and Experience Drive Internationalization Patterns, ZEW Discussion Paper No. 11-022, Mannheim.