Invest Local or Remote? COVID-19 Lockdowns and Venture Capital Investment
43 Pages Posted: 7 Jul 2021
Date Written: June 21, 2021
Exploiting the staggered introductions and lifting of COVID-19 lockdowns across different regions in China, we study how lockdowns affect the investment decisions of venture capital (VC) investors. China provides a unique setting that allows us to examine VC investment decisions after the pandemic is under control and lockdowns are lifted. Contrary to the conventional wisdom that VCs tend to invest in local ventures during lockdowns, we find that they invest in remote ventures during lockdowns and such effects persist even after lockdowns are lifted. Such lockdown effects are stronger when there is better internet infrastructure, when the level of information asymmetry between VCs and entrepreneurs is lower, when VCs are more experienced, and when ventures are in the early stages of development. The lockdown effects can be explained by the advancement of remote communication technology as a response to the social distancing requirements. As VCs invest in remote ventures, the regional inequality of entrepreneurial access to VC financing has been reduced. Our findings uncover how VC investors adapt to the pandemic and such changes can have long-lasting effects in the post-pandemic era.
Keywords: Venture Capital, Entrepreneurship, COVID-19, Pandemic, Lockdown
JEL Classification: G24, G23, L26
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