Spatial Proximity Effects and Regional Equity Gaps in the Venture Capital Market: Evidence from Germany and the United Kingdom

Abstract

The issue of 'equity gaps' has loomed large in recentdiscussions of enterprise formation and development, both in the United Kingdomand in Germany. One particularly intriguing, but highly elusive, aspect of thisissue is the question of whether equity gaps have a regional dimension: arecertain regions at a systematic disadvantage with respect to the provision ofequity capital? In this paper, we explore this question in the context of the UK and Germanventure capital industries, drawing both on unpublished industry data and oninformation obtained from original surveys of venture capital firms in the twocountries. We report clear evidence that the venture industries in bothcountries are spatially constituted. Despite important national differences,venture capital firms tend to be concentrated in identifiable clusters andtheir investment outcomes show clear evidence of spatial proximity effects;investment is disproportionately concentrated in those regions that alsocontain the major clusters of venture capital firms. However, how far thisspatial form produces regional equity gaps is hard to determine. Venturecapitalists themselves argue that they do not intentionally discriminatebetween regions in their decisionmaking, and many acknowledge the existence offunding and deal-size gaps but not regional gaps perse. But theirperception of project risk is, nevertheless, regionally sensitive. We argue that the notion of a simple supply gap overlooks the way in whichthe localised form of the industry is based on a dynamic learning process inwhich demand and supply processes combine with their embeddedness in socialnetworks and individual perceptions in a mutually reinforcing way.Less-favoured regions, with low investment rates, few local venture capitalfirms, and a dearth of experienced specialist intermediaries, may thus betrapped in a situation of both depressed demand for and supply of venturecapital investment. (Publication abstract)

Keywords: Network embeddedness, Equity gap, Spatial proximity, Experimental/primary research, Venture capital, Clusters, Equity capital, Equity financing, Social networks, Startups