Does Distance Matter? Evidence from Swedish Venture Capital Backed Firms
Sammanfattning: The Venture Capital Industry has evolved from the purpose of bridging the funding gap of local businesses into an international alternative asset class. Cross-border investments have become common in today's globalized business environment. Yet, very little research has been done on the implications of increased distance between the parties involved in venture capital investments. While classical finance theory suggests a negative relationship between geographical distance and performance, we still see an increasing amount of distant investments occurring in the wake of the internationalization of the VC industry. Especially, the informational opaqueness of these investments is considered to reinforce the issues associated with distance. Using data from 1,157 Swedish VC-backed ventures between October 1989 and October 2019, this paper applies a binary response Probit model to examine the effect of distance on performance, measured as exits via trade sale or IPO. The results suggest that distance has no adverse effect on VC investments in the Swedish market. We instead find that distance is positively affecting exit rates, presumably due to the presence of international investors. Our results indicate that international investors can overcome problems associated with distance in later stages while we find that domestic investors add the most value in the first round. We further find that distance between VCs has no negative impact on exits, implying that collaboration is not affected by larger distances.
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