Investment Proximity and Venture Capital Returns

45 Pages Posted: 18 Feb 2020 Last revised: 7 Jul 2020

See all articles by C. N. V. Krishnan

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Daniel Nguyen

Case Western Reserve University

Date Written: June 30, 2020

Abstract

Using a large dataset of 82,818 investments in start-up firms from December 1965 through August 2019, we document that the biggest group of investors are venture capital firms (about 79% of all observations). The majority of in-state investments are found clustered in California (with the San Francisco VC Hub), Massachusetts (with the Boston VC Hub) and New York. Returns generated from early round investing to late round decrease generally: early investors generate a higher return than late stage investors, and IPO exits entail the highest return. We find that geographical proximity is significantly and positively associated with cumulative returns or annualized returns, when we use actual distance (in km) between the VC investment firm HQ and portfolio firm HQ, or a cross-region indicator variable when the portfolio firm HQ is out-of-state as compared to VC investment firm HQ. The relation between investment proximity and returns continues to be robust even after controlling for selection bias, and in a matched-sample analysis where we pair each proximate investment with a matched distant investment. We find that VC Director and other outside directors as a proportion of all Directors on the boards on portfolio companies is significantly higher, on average, for in-state and shorter distance investments as compared to out-of-state or longer distance investments, indicating better involvement by VCs in their more proximate investments.

Keywords: VC Investments, Returns, Cumulative Returns, Annualized Returns, Geographical Proximity, Distance, Cross-State Investments, VC Directors, VC Hub, VC favored Industries, Matched-Sample analysis, Selection bias control.

JEL Classification: G24

Suggested Citation

Krishnan, C. N. V. and Nguyen, Daniel, Investment Proximity and Venture Capital Returns (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3535961 or http://dx.doi.org/10.2139/ssrn.3535961

C. N. V. Krishnan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

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HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

Daniel Nguyen

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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