Buying Local May Not Be So Good for US VC Firms
Venture capital firms in VC hubs such as Northern California tend to deliver superior performance, but that does not appear to derive from locally-based investments, according to a new working paper published by Harvard Business School.
More than half of the 1,000 venture capital offices listed in Pratt’s Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas – San Francisco, Boston, and New York, the paper notes. More than 49% of the U.S.-based companies financed by venture capital firms are located in these same three cities.
“Surprisingly, much of the VC outperformance in these venture capital centers arises from their non-local investments. This finding is counterintuitive, since venture capitalists might be expected to be the most involved and add the most value to the geographically closest companies. We observe this outperformance of non-local companies in both early- and latestage investments. ”
“One potential explanation for this higher return to non-local deals is that venture capitalists have a higher hurdle rate (i.e., require a higher expected rate of return) for investments that have a higher monitoring cost. This higher hurdle rate may reflect the imputed (personal) cost of traveling to remote locations.”
Outperformance of non-local investments suggests that policy makers in regions without local venture capitalists might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.
Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion
Henry Chen, Paul Gompers, Anna Kovner, Josh Lerner
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