5. when u.s. venture capital ventures abroad

8/15/2019 5. When U.S. Venture Capital Ventures Abroad

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When U.S. venture capital ventures abroad

Khaled Abdoua

, Oscar Varelab

aDivision of Engineering, Business and Computing, Penn State University, Berks Campus,

Reading, PA, USA*bDepartment of Economics and Finance, College of Business Administration, University of

Texas at El Paso, El Paso, TX, USA

Abstract

Older, more experienced and smaller U.S. venture capital firms are most

probable to sacrifice proximate distance for new opportunities in foreign, and

mostly mature, portfolio companies. These companies are treated differently

than the domestic ones, as U.S. venture capital firms collaborate with and

delegate monitoring to foreign partners, rather than stage or syndicate.

Successful outcomes mostly occur in more mature, non-hi-tech, portfolio

companies that receive more financing per round. Our results are robust to the

investee country’s openness and industry classification, stage of the investment

and possible sample selection problems.

Key words: Venture capital; International; Globalization

JEL classification: G15, G24, G32, G34

doi : 10.1111/acfi.12005

1. Introduction

Numerous reasons besides superior returns motivate venture capital (VC)investments abroad. These include a good business environment, with private

property rights and regulatory stability, high expected economic growth and broad

economic integration. Locals’ investing in their own markets also motivates VCs

foreign investments, particularly when high-end human capital, vibrant patent

We thank the journal’s editor Robert Faff and the anonymous referee for their in-depthand thoughtful comments that significantly improved this paper. Any remaining errorsare the responsibility of the authors.

Received 26 September 2011; accepted 11 September 2012 by Robert Faff (Editor).

*Correction added on 10 March 2014 after first publication online on 2 November 2012:Khaled Abdou’s affiliation has now been corrected.

© 2012 The AuthorsAccounting and Finance © 2012 AFAANZ

Accounting and Finance 54 (2014) 1–23


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counts and efficient stock markets exist. This paper examines within the context of

these investments the characteristics of U.S. venture capital firms that invest

abroad, in terms of reputation and size, how they manage these longer distance

investments and the characteristics that accompany their foreign successes.Gu ¨ ler and Guille ´ n (2004) find that the international investment decision depends

on superior returns, and Gu ¨ ler and Guille ´ n (2010b) find that VCs international

investments are more likely when foreign markets are innovative, have regulatory

stability, protect investors and facilitate exit. Venture capitals’ foreign investments

lag that of locals according to Ma ¨ kela ¨ and Maula (2008), as locals harbour

knowledgeof value to foreign VCs. Aizenman and Kendall (2008) find that VCs are

attracted to locations with ‘high-end human capital, a better business environment,

high levels of military expenditure, and deeper financial markets’, and Alhorr et al.

(2008) that a country’s promotion of broad economic integration influencesinvestments by foreign VCs. Higher economic growth and patent counts and more

viable stock markets, also attract foreign VCs, according to Schertler and Tykvova

(2010). Venture capital investments are also beneficial to portfolio companies,

especially when made in the portfolio company’s international target markets,

according to Ma ¨ kela ¨ and Maula (2005).1

Notwithstanding these motives, a paradox exists when VCs invest abroad.

Lerner (1995) points to the importance for monitoring that VCs have close

proximity (a few miles distance) to their portfolio companies. Close proximity

is important not just for these investments, but also for trade, as gravity models

from international economics show an inverse relation between distance and

trade between countries. Ma ¨ kela ¨ and Maula (2006) find that distance is also

inversely related to a VCs continued commitment to its portfolio company

when its prospects decline.2

Opportunities from foreign investing by VCs are associated with greater

distances between investor and investee,3 such that dealing with these

investments may require different approaches than those for domestic

investments. There is also a recognized gap in research into how VC manages

1 Other ancillary research on the VCs decision to go abroad include Wright et al. (2002)who show that U.S. VC firms in India adapt to the local market conditions, andMadhavan and Iriyama (2009) who find that immigrant groups in home and hostcountries forming ‘transnational technical communities’ serve to enhance the global-ization of VC. Ma ¨ kela ¨ and Maula (2005) also find that foreign venture capitalists canlegitimize an unknown new venture in a foreign target market so long as this marketdoes not differ from the foreign investor’s home market.

2 Distance may become marginally less important of an issue given better communi-cation infrastructures. Petersen and Rajan (2002) find that the distance betweencommercial banks and small business customers becomes less important with techno-

logical advancements.3 Sheahan (2004) shows that VCs invested $761 million into Business ProcessOutsourcing (offshoring) startups in the first half of 2004, up from $495 million duringthe same period in 2003.


2 K. Abdou, O. Varela/Accounting and Finance 54 (2014) 1–23


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foreign investments. Wright et al. (2005) state that ‘…our review of the

literature indicates that there is a major research gap in relation to work dealing

with the crossing of country borders by VC firms.’ Since then, we have

observed research on motives that drive VC to invest abroad, but little on howthey manage their foreign investments.

Rin et al. (2011) noted in their comprehensive survey of VC research that

many questions still need to be answered regarding international money flows in

the VC industry. Schertler and Tykvova (2009, p. 14) mention areas for

international VC research that correspond to the present research as elucidated

below.

‘More specifically, it would be interesting to know whether country factors or

sector factors drive the composition of venture capitalists’ portfolios. In addition,

the entrance strategy of venture capitalists has not received much attention in theacademic literature. In particular, the analysis of cross-border syndication, i.e. the

joint investment by domestic and foreign VCs, would deserve a profound

investigation, since managing a syndicate across borders is usually much more

difficult than managing a local syndicate. Another interesting issue we have not

discussed in this paper is the success of cross-border investments in terms of the

performance of the portfolio companies as well as the venture capitalists’ returns.’

This research addresses this gap in examining reputation and size factors in

U.S. venture capital firms going abroad, and the processes that they use in

managing their longer distance investments in the foreign environment, aswell as some of the characteristics accompanying their successes. Key

contributions of this research include the following. Smaller size U.S. VCs

typically go international with investments that are less syndicated, perhaps

because they lack knowledge of partners. They possibly grandstand with

riskier investments and do not appear to use staging as a monitoring

mechanism, as they finance higher amounts per round over fewer rounds.

They appear to prefer to collaborate with foreign counterparts by delegating

monitoring to foreign partners, and they are not likely to invest in high-tech

portfolio companies, possibly because of difficulty in monitoring them.Success abroad is more probable for U.S. venture capital firms that are older,

more experienced and smaller, and which invest in mature portfolio

companies. Success also improves with increased presence on the board of

directors of the international portfolio companies and decreased reliance on

foreign VC counterparts.

The remainder of this paper is divided as follows. Section 2 describes

additional literature on VCs management of foreign investments, while Section

3 discusses the methodology and research questions. Section 4 discusses the

sample data, limitations and summary statistics. Section 5 presents theempirical results, and Section 6 examines their robustness for country

differences, industry classifications and financing stages. Section 7 concludes

the paper.


K. Abdou, O. Varela/Accounting and Finance 54 (2014) 1–23 3


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2. Literature

The literature on the role of the VCs reputation and size in investing abroad

is reviewed below. Also, as our research examines how going internationalaffects the VCs relationship with its more distant portfolio companies, we

review literature on the monitoring, delegating and syndicating activities of

VCs in this new environment.

2.1. Experience and size

Fernhaber and McDougall-Covin (2009) find a positive relation between

reputation and going international for VCs, for the former may promote the

latter as home country advantages can promote foreign expansion. Gu ¨ ler andGuille ´ n (2010a) report that VCs local status is transferable to foreign markets

and influence the decision to invest abroad. Hall and Tu (2003) use a sample of

VC firms in the UK in 2000 and find that size is positively related to their decision

to go overseas and that young VCs are less likely to invest internationally.

2.2. Monitoring, delegating and syndicating

Monitoring appears related more to uncertainty rather than to performance

or lack thereof. Sapienza et al. (1996) find that portfolio companies are not

more highly monitored when their performance is poor. And consistent with

Lerner (1995), they find that VCs engage in more oversight in early stages and

when greater uncertainties exist. Bygrave (1987, 1988) finds that uncertainty is

directly correlated with co-investing4 and information sharing among VCs.

And VCs can control risk and reduce uncertainty by specializing in a stage and

industry, according to Norton and Tenenbaum (1993) and Bygrave (1987,

1988).

United States venture capital firms appear to behave differently towards their

portfolio companies depending on whether they are domestic or international.

Wang et al. (2002) find that participation by Singapore-based VCs in portfoliocompanies lagged U.S. VCs. Sapienza et al. (1996) compare VC governance in

the United States, UK, the Netherlands and France and conclude that VCs are

driven by different factors in different markets. Pruthi et al. (2003) find that

foreign VCs are more likely to be involved at the strategic level and domestic

ones at the operational.

Venture capitalists serve as members of the board of directors and typically

have power to fire senior management, according to Gorman and Sahlman

(1989). Lerner (1995) finds that VC representation increases around events such

as CEO turnover.

4 Co-investing refers to the sharing of investments among a group of VCs. Typically,there is a lead VC who invites other VCs to participate in an investment.




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Overall, the VCs decision to invest internationally is dependent on superior

returns, business environment, financial markets development and quality of

human capital. Distance can be a factor in terms of the commitments made and

foreign involvement can follow local involvement. Monitoring is related moreto uncertainty than to performance, and VCs behave differently towards their

international portfolio companies.

The present research probes more deeply the question about the VCs size and

reputation as factors in the foreign investment decision, and its practice of

monitoring, staging and syndicating foreign portfolio companies.

3. Methodology and research questions

3.1. Logistic regressions

Logistic regression INTPROB concerns the probability of a U.S. VC going

international, while INTSUC concerns the probability that a U.S. VCs

international investment is a success, that is, the international portfolio

company goes public. Our 1990 to 2004 sample includes sub-sample 1

consisting of United States-based VC funds that invest in non-U.S. interna-

tional portfolio companies and sub-sample 2 consisting of VC funds that invest

only in U.S. portfolio companies. The independent variables in both regres-

sions measure characteristics of the VC, including size and reputation, and its

management of the portfolio company, including its monitoring, delegating

and syndicating activities.

INTPROB is specified as:

INTL ¼ aþ b1FMAGE þ b2COAGE þ b3RNDS þ b4RNDS $ þ b5NOFM =NOFD þ b6FDINV þ b7INDþb8EXEC %þ b9FOR%þ b10NOBOD þ b1113STAGES þ b1423INDUSTRY þ e ð1Þ

where dependent variable INTL is a dummy variable equal to ‘one’ if theportfolio company is an international portfolio company funded by a U.S.

venture capital fund, and ‘zero’ if it is a domestic company. This regression

requires two sub-samples, one of international and another of domestic

portfolio companies, such that it uses sub-samples 1 and 2.

INTSUC is specified as:

SUCCESS ¼ aþ b1FMAGE þ b2COAGE þ b3RNDS þ b4RNDS $ þ b5NOFM =NOFD þ b6FDINV þ b7IND þ b8EXEC %

þ b9FOR%þ b10NOBOD þ b1113STAGES þ b1423INDUSTRY þ e

ð2Þ




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where SUCCESS is a dummy variable equal to ‘one’ if the international

portfolio company has gone public and ‘zero’ otherwise.5 This regression also

requires two sub-samples, one of successful and another of unsuccessful

international portfolio companies and thus uses only sub-sample 1, with itssub-division into successful and unsuccessful portfolio companies.

The independent variables in these regressions are the following. FMAGE is

the age of the VC firm, measured in years and serves as a proxy for the VCs

experience, and COAGE is the age of the portfolio company, measured in years

and serves as a control variable for the establishment/experience of the

portfolio company. FDINV is the average size of the VC fund’s investment (in

U.S. $ millions) in its portfolio companies and serves as a proxy for the fund’s

size. RNDS is the number of rounds the VC used to fund the portfolio

company, and RNDS$ is the average financing amount (in U.S. $ millions) perround distributed to the portfolio company. These variables serve as proxies for

monitoring. NOFM (NOFD) is the number of VC firms (funds) involved in

funding the portfolio company and serve as proxies for syndicating. IND is a

control dummy variable equal to ‘one’ if the VC specializes in the high-tech

industry and ‘zero’ otherwise.

The following variables are added for robustness checks or further controls,

as explained later. EXEC% is the percentage of the non-managing relative to

the total number of members of the board of directors of the portfolio

company, and FOR% is the percentage of foreign VC funds relative to the total

number of VC funds invested in the portfolio company. These variables serve

as proxies for delegating. NOBOD is the number of members on the board of

directors. STAGES consists of three dummy variables that control for the

different stages of financing that the portfolio companies receive, including

start-up and seed stage, early stage and later stage (stages beyond the ‘later’

stage were omitted to avoid multicolliniarity). INDUSTRY is a group of nine

dummy variables that control for the different industries of the portfolio

companies. These substitute for IND in subsequent robustness tests and include

biotechnology, communications and media, computer hardware, computer

software and services, computer related, industrial and energy, internet specific,medical health and semiconductors. Finally, ɛ is the random error term.

3.2. Research questions

Our research questions concern the experience and size of the VCs that

engage in international investments, and their monitoring, delegating and

syndicating approaches towards their international portfolio companies.

5 We do not use returns to measure success because VentureXpert has very minimalinformation about returns on the portfolio firm level and returns on the non-publicportfolio company are not available. Moreover, on the VC fund/firm level, the returnsare not available on a firm-specific basis due to privacy issues.




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Formal hypotheses are not stated due to the lack of a theoretical framework

underpinning our research questions. Nevertheless, the possible signs for the

coefficients in both the INTPROB and INTSUC regressions are summarized in

Table 1 and discussed below.

3.2.1. Experience

Experienced VCs may better handle riskier international investments, with

their greater knowledge and reputation compared with their inexperienced

counterparts. In our literature review, Fernhaber and McDougall-Covin (2009)

find a positive relationship, and Gu ¨ ler and Guille ´ n (2010a) find that local status is

transferable to foreign markets. Unseasoned VCs may be too busy accumulating

knowledge and networking to manage/monitor their domestic portfolio com-panies to bother with the international investment. Hall and Tu (2003) find that

young VCs are less likely to invest internationally. While these arguments suggest

that experienced VCs are more international, it is possible that grandstanding6

may motivate the inexperienced ones to go international. Thus, in INTPROB,

the sign for FMAGE (the age of the VC firm), which Lerner (1994b) used to

differentiate between seasoned and inexperienced VCs, is uncertain. However,

the VCs experience may be positively related to its international success,

suggesting that in INTSUC, the sign for FMAGE is positive.

3.2.2. Size

Larger size VC funds, with possibly less absolute risk aversion, may be more

willing and able to take risks relative to smaller ones, including the added

risks of international investments. In our literature review, Hall and Tu (2003)

find that size of VCs is positively related to their decision to go overseas. Yet,

smaller funds may invest internationally to enhance returns and growth,

beyond any grandstanding motives.7 Thus, in INTPROB, the sign for FDINV

is uncertain. However, size may be positively related to successful interna-

tional investments, given that larger size VC funds may be larger in partbecause of past successes, suggesting that in INTSUC, the sign for FDINV is

positive.

6 Gompers’ (1996) ‘grandstanding’ hypothesis suggests that companies backed by lessseasoned VC firms are younger and more under-priced compared to those backed byexperienced VC firms. The younger VCs grandstand to quickly distinguish themselvesfrom the experienced. From that view, inexperienced VCs will take more risks to earnthe good reputation quickly.

7 Wilson and Williams (2000) find mixed results between countries regarding the growthof smaller banks. Their results show that in Italy smaller banks grow faster than largerbanks, however no significant relation was found between size and growth in France,Germany and the UK.




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Table 1

Signs for independent variables in LOGIT regressions INTPROB and INTSUC

LOGIT regression INTPROB INTSUC

Independent variables Dependent variable: INTL Dependent variable:

SUCCESS

Experience variables

FMAGE – age in

years of VC, proxy

for VC experience

Uncertain – going international

may require experience, but

inexperience may also go

international to grandstand

>0, experience positively

related to international

success, as experience

generally correlates with

success

COAGE – age in years of

portfolio co., control variable

for establishment/experienceof portfolio co.

Control variable Control variable

Monitoring variables

RNDS – no of rounds

the VC used to fund

portfolio co.

RNDS$ – ave. financing

(in U.S. $ millions)

per round to

portfolio co.

Uncertain – greater investment

uncertainty leads to more

monitoring, but longer

international distances may

lead to delegating instead

Uncertain – successful

ventures have same

monitoring/delegating

tradeoffs already noted

in INTPROB regression

Syndication variables

NOFM –

no. of VC firmsinvolved in funding the

portfolio co.

NOFD – no. of VC funds

involved in funding the

portfolio co.

Uncertain –

syndication withmore firms and funds shares

international investments risk,

but VCs may lack knowledge

of international partners to

syndicate with

Uncertain –

same reasonas for INTPROB

regression

Size variable

FDINV – ave. size

of VC fund’s investment

(in U.S. $ millions) in

its portfolio co.

Uncertain – size positively

related to decision to go

international, but beyond

grandstanding smaller

inexperienced funds may gointernational to enhance returns

>0, larger size funds may

be larger due to prior

successes

IND – control dummy = 1 if

VC specializes in high-tech

industry, =0 otherwise

Control variable Control variable

Delegation variables

EXEC% – % of non-managing

to total members of board of

directors of portfolio co.

FOR% – % of foreign

VC funds to total

no. of VC fundsinvested in portfolio co.

Uncertain – monitoring and

delegating are imperfect

substitutes, such that the sign

for these proxies for delegating

is uncertain

Uncertain – same reason

as for INTPROB

regression




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3.2.3. Monitoring

Monitoring techniques include the number of rounds and average dollar

financing per round. After each round, the portfolio company is expected to

update the VC, as a pre-condition to advancing to the next round. Greater

investment uncertainty motivates more monitoring, according to Gompers

(1995). In our literature review, Sapienza et al. (1996), consistent with Lerner

(1995), find that greater uncertainties result in more VC oversight. We mighttherefore expect closer monitoring by VCs of their international portfolio

companies. The uncertainties derived from the greater distances within an

international setting for such investments may necessitate a greater number of

rounds (RNDS ) and less funding per round (RNDS$). However, in the

international setting, VCs may decide to use alternative approaches to monitor,

such as delegating responsibility, making its effect on monitoring uncertain.

Thus, in INTPROB, the signs for RNDS and RNDS$ are uncertain. In

addition, United States-based VCs with successful international investments

may either monitor or delegate, suggesting that in INTSUC, the signs for thesevariables are also uncertain.

3.2.4. Delegating

A VC delegates when it collaborates and assigns its monitoring function to a

counterpart, which in an international investment is a foreign counterpart.

Bushman et al. (2000) show that the value of delegation is linked with private

information, which may be relevant for a VC encountering (in an international

setting) language barriers, cultural differences and/or ignorance of local law.The proportion of non-managing to total number of directors (EXEC%) will

be smaller if delegation occurs, because only the agent VC will sit on the board

of directors. Also, the percentage of foreign VC funds to the total number of

LOGIT regression INTPROB is specified as:

INTL =

a +

b1FMAGE +

b2COAGE +

b3RNDS +

b4RNDS$ +

b5NOFM /NOFD+ b6FDINV + b7IND + b8EXEC% + b9FOR% + b10NOBOD + b11 – 13STAGES

+ b14 – 23INDUSTRY + b24 – 25COUNTRY + e

where dependent variable INTL is a dummy variable equal to ‘one’ if the portfolio company

is an international portfolio company funded by a U.S. VC fund, and ‘zero’ if it is a domestic

company. LOGIT regression INTSUC is specified as:

SUCCESS = a + b1FMAGE + b2COAGE + b3RNDS + b4RNDS$ + b5NOFM /NOFD

+ b6FDINV + b7IND + b8EXEC% + b9FOR% + b10NOBOD

+ b11 – 13STAGES + b14 – 23INDUSTRY + b24 – 25COUNTRY + e

where SUCCESS is a dummy variable equal to ‘one’ if the international portfolio company

has gone public and ‘zero’ otherwise.

Table 1 (continued)




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funds invested in the portfolio company (FOR%) will be higher if more

delegation occurs in the foreign setting, because the foreign VC funds act as the

collaborators with the domestic one.

There is uncertainty over the VCs choice between monitoring and delegatingfor international investments, as these may be imperfect substitutes, suggesting

that in INTPROB, the signs for EXEC% and FOR% are uncertain. Similarly,

United States-based VCs with successful international investments may either

monitor or delegate, suggesting that in INTSUC, the signs for EXEC% and

FOR% are also uncertain.

3.2.5. Syndicating

Venture capitalists normally share resources through network interaction andbear more risk when investing internationally. Lerner (1994a) finds that VCs are

willing to accept lower returns for lower variances and may as a result participate

in syndicates. He also shows that syndicate members may certify investment

decisions (provide second opinions) in the first and subsequent rounds of funding.

In our literature review, Bygrave (1987, 1988) correlates the level of uncertainty

directly with co-investing and information sharing among VCs.

Venture capitalists may try to syndicate their international investments to

divide risk with more NOFM and NOFDs, as more firms and funds may certify

investments through information sharing, possibly to a greater extent than for

domestic ones. The problem is that they may have fewer syndicate partners

internationally, owing to international inexperience. Thus, the signs for NOFM

and NOFD in the INTPROB and INTSUC regressions are uncertain.

4. Sample data, limitations and summary statistics

The portfolio company segment of the Securities Data Corporation’s (SDC)

VentureXpert database is the source for our data. The 1 January 1990 to 31

December 2004 study period includes the dot.com growth and bubble periods,

the 1990s robust U.S. economy (including a U.S. government budget surplus),and the period after 11 September 2001 (including the ‘war on terror’ and U.S.

government deficits).8 We have excluded the periods leading up to and after the

housing market crash in the U.S., and the recession that followed, as the story

concerning these events is not yet complete. Nevertheless, the final sample is

sufficiently large, consisting of 18,372 companies, with 4,307 international

8 Admittedly, a large percent of VC activity occurred over the dot.com bubble period,from 1997 to 2000. During this period, a large number of new VC firms appeared, manysmall in size, and this fact could affect our results. In addition, having our samplerestricted to a period that includes the bust of the dot.com bubble certainly is alimitation of this study. Also, the sample includes some portfolio companies that wereestablished in 2005 which means that VCs invested in those companies while they werestart-ups.




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portfolio companies funded by one or more United States-based VC funds and

14,065 U.S. domestic companies similarly funded.

Two sub-samples were obtained from VentureXpert database’s portfolio

company segment, which differentiates between firms, funds and portfoliocompanies’ variables. One was restricted to U.S. venture capital funds that

invest in international portfolio companies (located outside the U.S.) and

another to those that invest only in U.S. portfolio companies. The database

comes from voluntary submission of data by venture capitalists, with

companies submitting conflicting data omitted from analysis. Another limita-

tion is the database’s absence of a complete set of accounting variables for the

portfolio companies, limiting the scope of our investigation. A ‘look-back’ or

‘backfill’ bias is also possible in the data set, if the SDC fills in prior

information for companies that are currently reporting in our sample.Table 2 categorizes the frequency of the U.S. VCs 4,307 foreign investments

by 27 countries. The UK is most frequently targeted, with 821 portfolio

companies, or 19.06 per cent of the total, possibly driven by its presence as an

international financial centre with no language barriers for U.S. VCs. Canada

ranks second with 416 companies or 9.66 per cent of the total. France, South

Korea, Germany, Israel, Australia, India, Japan, Sweden, China, Ireland and

the Netherlands each account for at least 2 per cent of the total and collectively

for 59.73 per cent. Brazil and Argentina are the only Latin American countries

among the 27 country group.

The univariate descriptive statistics, unreported to conserve space, show that

international investments by VCs have higher success rates compared with

domestic ones, possibly motivating these investments.9 International portfolio

companies are also monitored less often, and experience fewer but more

intensely financed rounds. Venture capitalists syndicate international invest-

ments less than domestic ones, and those that invest internationally are smaller

than those that do not. Venture capitalists that invest internationally are less

involved in high-tech investments and delegate monitoring to one or a few

foreign VC funds, instead of syndicating. They also have more seats on the

board of directors of the investee for their international investments comparedwith domestic ones. These differences are all significantly different.

Correlation coefficients among the variables show that financing rounds are

significantly positively correlated with syndication – measured by the number of

VC firms and funds in funding the portfolio company – in both the U.S. and

international samples. These measures of syndication also have significant

positive correlation with each other, making them good substitutes. The higher

the number of VC firms and funds in funding a portfolio company, the higher

the percentage of non-managing directors and foreign VC funds. The size of the

9 The details concerning the descriptive statistics are available from the authors uponrequest. In the analysis of these statistics, the hypotheses of equal means and variancesare rejected for all variables, except for COAGE for means and FMAGE for variances.




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VCs fund and percentage of non-managing directors and number of firms,

respectively, have negative significant correlations for the international sample,

suggesting that bigger funds delegate more and have fewer firms in the

international setting. Other correlation coefficients are insignificant.

5. Empirical results

5.1. INTPROB on VCs international versus domestic portfolio companies

The results for two specifications of regression INTPROB appear in Table 3,

Panel A. The first specification includes variable NOFM and the second NOFD,

Table 2

Country rankings of U.S.-based venture capital firms international investments and number of

portfolio companies per country

Rank Country Number of portfolio companies Percentage of total

1 United Kingdom 821 19.06

2 Canada 416 9.66

3 France 408 9.47

4 South Korea 281 6.52

5 Germany 268 6.22

6 Israel 232 5.39

7 Australia 224 5.20

8 India 158 3.67

9 Japan 138 3.20

10 Sweden 138 3.2011 China 122 2.83

12 Ireland 96 2.23

13 Netherlands 92 2.14

14 Finland 79 1.83

15 Switzerland 77 1.79

16 Singapore 73 1.69

17 Belgium 71 1.65

18 Hong Kong 59 1.37

19 Denmark 55 1.28

20 Taiwan 53 1.23

21 Italy 49 1.1422 Spain 43 1.00

23 Brazil 32 0.74

24 Norway 30 0.70

25 Poland 29 0.67

26 Austria 28 0.65

27 New Zealand 24 0.56

27 Argentina 21 0.49

Other 190 4.41

Total International 4307 100.00

United States 14,065

Total 18,372




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T a b l e 3

L O G I T r e g

r e s s i o n s I N T P R O B a n d I N T S U

C r e s u l t s

R e g r e s s i o n

P a n e l A

I N T P R O B –

d e p e n d

e n t v a r i a b l e I N T L

P a n e l B

I N T S U C –

d e p e

n d e n t v a r i a b l e S U C C E S S

S p e c i fi c a t i o n

( 1 )

( 2 )

( 1 )

( 2 )

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C O N S T A N T

2 . 0

5 9 0

0 . 0

0 0 0

2 . 1

5 5 0

0 . 0

0 0 0

2 . 4

3 4 0

0 . 0

0 0 0

2 . 3

8 1 3

0 . 0

0 0 0

F M A G E

0 . 0

2 2 6

0 . 0

0 0 0

0 . 0

2 3 5

0 . 0

0 0 0

0 . 0

1 5 3

0 . 0

0 0 3

0 . 0

1 4 7

0 . 0

0 0 5

C O A G E

0 . 0

0 7 9

0 . 0

0 1 1

0 . 0

0 7 6

0 . 0

0 1 6

0 . 0

3 0 1

0 . 0

0 0 0

0 . 0

2 9 9

0 . 0

0 0 0

R N D S

0 . 0

5 9 4

0 . 0

0 0 7

0 . 0

3 9 9

0 . 0

2 7 1

0 . 0

2 7 3

0 . 3

4 3 8

0 . 0

2 2 8

0 . 4

4 6 9

R N D S $

0 . 0

0 2 8

0 . 0

0 0 0

0 . 0

0 2 7

0 . 0

0 0 0

0 . 0

0 2 0

0 . 0

0 1 0

0 . 0

0 2 1

0 . 0

0 0 6

N O F M

0 . 2

0 2 0

0 . 0

0 0 0

0 . 0

6 0 4

0 . 0

0 1 8

N O F D

0 . 1

6 2 4

0 . 0

0 0 0

0 . 0

3 5 6

0 . 0

2 8 8

F D I N V

0 . 0

0 2 5

0 . 0

0 0 3

0 . 0

0 2 7

0 . 0

0 0 3

0 . 0

1 2 8

0 . 0

0 6 1

0 . 0

1 2 7

0 . 0

0 6 8

I N D

0 . 2

7 0 9

0 . 0

0 0 0

0 . 2

8 4 1

0 . 0

0 0 0

0 . 2

4 5 6

0 . 0

1 5 0

0 . 2

3 9 7

0 . 0

1 7 4

E X E C %

0 . 0

0 8 9

0 . 0

0 0 0

0 . 0

0 8 9

0 . 0

0 0 0

0 . 0

1 5 7

0 . 0

0 0 0

0 . 0

1 5 9

0 . 0

0 0 0

F O R %

0 . 0

8 4 7

0 . 0

0 0 0

0 . 0

8 4 0

0 . 0

0 0 0

0 . 0

1 0 2

0 . 0

0 0 0

0 . 0

0 9 9

0 . 0

0 0 0

N a g e l k e r k e R

- S q u a r e

0 . 6

5

0 . 6

5

0 . 1

3

0 . 1

2

C h i - s q u a r e

1 0 3 9 1 . 3

2

0 . 0

0

1 0 3 8 6 . 8

4

0 . 0

0

2 9 8 . 1

8

0 . 0

0

2 9 3 . 4

4

0 . 0

0

L O G I T r e g r e s s i o n I N T P R O B r e s u l t s c o n c e r n t h e p r o b a b i l i t y o f U . S . b

a s e d V C s i n v e s t m e n t s b e i n g i n i n t e r n a t i o n a l p o r t f o l i o c o m p

a n i e s , w i t h

I N T L a s t h

e d e p e n d e n t v a r i a b l e ,

f o r t w o

s p e c i fi c a t i o n s ( P a n e l A ) ; a n d L

O G I T r e g r e s s i o n I N T S U C r e s u l t s c o n c e r n t h e p r o b a b i l i t y o f

s u c c e s s f o r

U . S .

b a s e d

V C s i n v e s t m e n t s i n i n t e r n a t i o n a l p o r t f o l i o c o m p a n i e s , w i t h S U C C E S S a s t h e d e p e n d e n t v a r

i a b l e ,

f o r t w o s p e c i fi c a t i o n s ( P a n e l B ) T h e

v a r i a b l e d e fi n i t i o n s a r e a s f o l l o w s . I N T L

i s a d u m m y v a r i a b l e t h a t e q u

a l s o n e i f t h e p o r t f o l i o c o m p a

n y i s a n i n t e r n a t i o n a l p o r t f o l i o c o m p a n y

f u n d e d b y a U . S . v e n t u r e c a p i t a l ( V C ) f u n

d , a n d z e r o i f i t i s a d o m e s t i c c o m p a n y .

F M A G E i s t h e a g e i n y e a r s o f t h e V C fi r m a n d s e r v e s

a s a p r o x y

f o r t h e V C

s e x p e r i e n c e .

C O A G E i s t h e a g

e i n y e a r s o f t h e p o r t f o l i o c o m p a n y a n d s e r v e s a s a c o n t r o l v a

r i a b l e f o r t h e e s t a b l i s h m e n t / e x

p e r i e n c e o f

t h e p o r t f o l i o c o m p a n y .

R N D S i s t h e n u m

b e r o f r o u n d s t h e V C u s e d t o f u n d t h e p o r t f o l i o c o m p a n y . R N

D S $ i s t h e a v e r a g e fi n a n c i n g a m o u n t ( i n

U . S .

$ m i l l i o n s ) p e r r o u n d d i s t r i b u t e d t

o t h e p o r t f o l i o c o m p a n y .

N O F M / N O F D i s t h e n u m b e r o f

V C fi r m s / f u n d s i n v o l v e d i n f u n d i n g t h e

p o r t f o l i o c

o m p a n y .

F D I N V i s t h e a v e r a g e s i z e o f t h e V C f u n d ’ s i n v e s t m e n t ( i n U . S .

$ m i l l i o n s ) i n i t s p o r t f o l i o c o m p a n i e s . I N D i s a c o n t r o l

d u m m y v a

r i a b l e e q u a l t o ‘ o n e ’ i f t h e V C s p e c i a l i z e s i n t h e h i g h - t e c h

i n d u s t r y , a n d ‘ z e r o ’ o t h e r w i s e

. E X E C % i s t h e p e r c e n t a g e o

f t h e n o n -

m a n a g i n g r e l a t i v e t o t h e t o t a l n u m b e r o f

m e m b e r s o f t h e b o a r d o f d i r e

c t o r s o f t h e p o r t f o l i o c o m p a n y .

F O R % i s t h e p e r c e n t a g e o f f o r e i g n V C

f u n d s r e l a t i v e t o t h e t o t a l n u m b e r o f V C

f u n d s i n v e s t e d i n t h e p o r t f o l i o c o m p a n y .




14/23

as these serve as different proxies for syndication. The Nagelkerke R-square for

both specifications is 65 per cent.

FMAGE is positive and statistically significant in both specifications,

suggesting that more experienced VC firms are more likely to invest ininternational portfolio companies. It does not appear that inexperienced VCs

grandstand to develop reputation by investing internationally. The control

variable COAGE is also positive and marginally significant, suggesting

that VCs target international investments in more mature portfolio

companies.

The two (uncorrelated) monitoring variables are statistically significant in

both specifications, with a negative sign for RNDS and positive for RNDS$.

These signs indicate an international monitoring style where VCs provide

higher financing per round over fewer number of rounds. While fewerinterim reports by the portfolio company are submitted to the VC, it is

likely that each report is more intensely reviewed. Thus, it does not appear

that VCs use greater levels of staging for international investments as a

monitoring mechanism.

International investments are less syndicated than domestic investments, as

the signs on the number for VC firms (NOFM ) and VC funds (NOFD) are

negative and significant in both specifications. This result may reflect the

relative inexperience of VCs in international investments and/or their lack of

knowledge of international partners with which to syndicate.

The size of VC funds measured by the US dollar value of their investments

(FDINV ) is statistically significant and negative in both specifications,

suggesting consistent with the summary statistics that smaller size funds invest

more internationally. This result does not support the idea that larger size funds

are more willing to invest internationally because their absolute risk aversion is

less. Rather, it supports the idea that smaller size funds grandstand through

riskier international investments, possibly motivated by their desire to establish

themselves and grow quickly by enhancing returns.

The high-tech industry dummy variable (IND) is statistically significant and

negative in both specifications, suggesting that VCs are not likely to invest inhigh-tech international portfolio companies, possibly because of some added

difficulty in monitoring hi-tech companies.

EXEC% has a significant negative and FOR% a significant positive sign in

both specifications. U.S. venture capitalists do not reserve many seats on the

board of directors for their international portfolio companies, but instead

involve more foreign VC funds in them. It appears that U.S. venture capitalists

prefer to collaborate with foreign counterparts, rather than sit on the board,

and thus delegate monitoring to foreign partner(s).




15/23

5.2. INTSUC on VCs successful international portfolio companies

The results for two specifications of regression INTSUC (similar to the

specifications in INTPROB) appear in Table 3, Panel B. The NagelkerkeR-square for both specifications is 13 and 12 per cent, respectively.

FMAGE is positive and significant in all specifications, such that older VCs

have higher probabilities of SUCCESS with international portfolio compa-

nies. This result, consistent with literature, suggests that experience adds value

to the portfolio company. COAGE is also positive and significant in all

specifications, suggesting that more mature portfolio companies increase the

probability of SUCCESS . RNDS is statistically insignificant in all specifica-

tions, while RNDS$ is positive and statistically significant. It appears that

higher financing of the international portfolio company per round (RNDS )improves the likelihood of success, independent of the number of rounds

(RNDS).

U.S. VCs appear to syndicate more in the case of successful international

investments, as NOFM and NOFD are positive and significant in both

specifications, although in INTPROB international investments are on the

whole less syndicated than domestic ones.

Smaller VC funds appear to be more successful in investing internationally,

as the sign for fund size (FDINV ) is negative and significant. The portfolio

company’s status as high-tech reduces the probability of success, as the sign of

IND is negative and significant. These results are consistent with our finding

that smaller funds are more likely to invest internationally, and the view that

high-tech companies are harder to control than other companies with more

tangible assets.

The delegation variables in both specifications are statistically significant,

with a positive coefficient for EXEC% and negative for FOR%. Thus, the

likelihood of success for the international portfolio companies is higher the

higher EXEC% and lower FOR%. Venture capitalists must increase their

presence on the board of directors of international portfolio companies and

decrease their reliance on foreign VC counterparts for greater success.Interestingly, our prior finding that international investments have lower

EXEC% and higher FOR% components contrasts with their need for success,

as the delegation characteristics for investing internationally contrast with the

requirements for success.

It is possible that there is a selection bias in the INTSUC results insofar as

there may exist an endogenous matching of successful international portfolio

companies with more experienced VCs.10 To address this problem, we

employed the Heckman correction on the basic INTSUC model, with robust

10 We thank the journal’s anonymous referee for pointing out this problem andsuggesting the Heckman correction procedure.




16/23

results, available from the authors upon request, that mostly continue to hold

even in the presence of such endogeneity.11

6. Robustness checks

6.1. Country differences

Cross-sectional differences in governance structures among the countries that

VCs are investing in may produce biased results. To address this possibility, we

classify our sample’s international investments into three country groupings,

based on openness to foreign investors, and level of financial and legal

developments. GROUP 1 is least open and developed, and includes Latin

American and African countries in our sample. GROUP 2 is more open anddeveloped, and includes India, China, Eastern European and Southeast Asian

countries. GROUP 3 is the most open and developed, and includes Japan,

Hong Kong, Canada, Australia, Western European countries, and other

offshore investment hubs. While there may be disagreement about a particular

country’s category, we believe that most would agree overall on GROUP 3 and

on GROUP 1, especially for African countries.12

Our regressions are repeated with two new dummy variables – GROUP 1 and

GROUP 2 – with GROUP 3 serving as the base. The results for INTPROB in

Table 4, Panel A show that these dummy variables are not significant

regardless of specification. It appears that the portfolio company’s country

does not affect the previously reported probability of VCs making international

investments. The results for INTSUC in Table 4, Panel B show that GROUP 2

is positive and significant, suggesting a higher probability of success in Asia,

India and Eastern Europe than in the other country groupings. Our results are

generally robust as it does not appear that the portfolio company’s country is a

factor in the probability of a VC going international or of its portfolio

company’s success. A further robustness check was conducted for country

11 The only differences are that RNDS became significant and NOFM becameinsignificant. The Mills ratio is significant. The results are unreported to conserve space.

12 The actual contracts that VCs have in different countries may not be significantlydifferent. Kaplan et al. (2003) find that U.S. style contracts are implemented regardlessof legal regime the more experienced the U.S. VC. Financing styles, however, may differbetween high enforcement, common law countries and low enforcement, civil lawcountries. Lerner and Schoar (2005) find that private equity often use convertiblepreferred stock with covenants in the former and common stock and debt, with equityand board control, in the latter. High enforcement countries also tend to have highervaluations.




17/23

T a b l e 4

C o u n t r y g r o u p i n g r o b u s t n e s s c h e c k s r e s u l t s

f o r L O G I T r e g r e s s i o n s I N T P R O B a n d I N T S U C

R e g r e s s i o n

P a n e l A

I N T P R O B –

d e

p e n d e n t v a r i a b l e I N T L

P a n e l B

I N T S U C –

d e

p e n d e n t v a r i a b l e S U C C E S S

S p e c i fi c a t i o n

( 1 )

( 2 )

( 1 )

( 2 )

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o n s t a n t

2 . 5

6 8 0

0 . 0

0 0 0

2 . 6

5 1 8

0 . 0

0 0 0

2 . 9

5 6 5

0 . 0

0 0 0

2 . 8

7 9 9

0 . 0

0 0 0

F M A G E

0 . 0

2 3 3

0 . 0

0 0 0

0 . 0

2 4 0

0 . 0

0 0 0

0 . 0

1 6 8

0 . 0

0 0 1

0 . 0

1 6 0

0 . 0

0 0 2

C O A G E

0 . 0

0 5 0

0 . 0

7 3 4

0 . 0

0 4 7

0 . 0

8 8 4

0 . 0

3 0 7

0 . 0

0 0 0

0 . 0

3 0 4

0 . 0

0 0 0

R N D S

0 . 0

3 0 5

0 . 1

0 4 7

0 . 0

0 8 4

0 . 6

6 5 4

0 . 0

0 1 4

0 . 9

5 9 8

0 . 0

0 4 9

0 . 8

6 8 7

R N D S $

0 . 0

0 2 7

0 . 0

0 0 0

0 . 0

0 2 7

0 . 0

0 0 0

0 . 0

0 2 1

0 . 0

0 0 9

0 . 0

0 2 2

0 . 0

0 0 5

N O F M

0 . 1

6 9 6

0 . 0

0 0 0

0 . 0

8 0 0

0 . 0

0 0 0

N O F D

0 . 1

4 1 3

0 . 0

0 0 0

0 . 0

4 9 0

0 . 0

0 2 9

F D I N V

0 . 0

0 2 2

0 . 0

0 0 5

0 . 0

0 2 3

0 . 0

0 0 5

0 . 0

1 2 1

0 . 0

1 1 1

0 . 0

1 1 8

0 . 0

1 3 1

I N D

0 . 3

3 3 2

0 . 0

0 0 0

0 . 3

4 1 5

0 . 0

0 0 0

0 . 3

0 8 1

0 . 0

0 2 7

0 . 2

9 9 6

0 . 0

0 3 5

E X E C %

0 . 0

0 9 0

0 . 0

0 0 0

0 . 0

0 9 0

0 . 0

0 0 0

0 . 0

1 7 0

0 . 0

0 0 0

0 . 0

1 7 2

0 . 0

0 0 0

F O R %

0 . 0

8 7 0

0 . 0

0 0 0

0 . 0

8 6 6

0 . 0

0 0 0

0 . 0

0 9 4

0 . 0

0 0 0

0 . 0

0 9 0

0 . 0

0 0 0

G R O U P 1

2 3 . 5

7 0 9

0 . 9

9 5 1

2 3 . 5

6 7 0

0 . 9

9 5 1

0 . 1

2 7 5

0 . 7

1 3 9

0 . 1

3 6 5

0 . 6

9 3 8

G R O U P 2

2 2 . 2

4 2 8

0 . 9

8 4 4

2 2 . 2

6 8 4

0 . 9

8 4 4

1 . 1

4 6 5

0 . 0

0 0 0

1 . 1

2 7 6

0 . 0

0 0 0

N a g e l k e r k e R - S q u a r e

0 . 7

2 8 1

0 . 7

2 8 5

0 . 1

6 6 2

0 . 1

6 3 3

C h i - s q u a r e

1 2 0 7 6 . 1

8

0 . 0

0 0 0

1 2 0 8 6 . 0

1

0 . 0

0 0 0

4 0 0 . 5

7

0 . 0

0 0 0

3 9 3 . 2

4

0 . 0

0 0 0

S e e t h e f o o

t n o t e t o T a b l e 3 f o r m o r e d e t a i l e d d i s c u s s i o n o f t h e r e g r e s s i o n s a n d v a r i a b l e d e fi n i t i o n s . T h e r o b u s t n e s s t e s t f o r I N T P R O

B f o r t w o

s p e c i fi c a t i o

n s ( P a n e l A ) a n d I N T S U C f o r

t w o s p e c i fi c a t i o n s ( P a n e l B ) c o

n c e r n s t h e g r o u p i n g o f c o u n t r i e s b a s e d o n t h e o p e n n e s s o f t h

e c o u n t r i e s

i n t h e s a m p l e t o f o r e i g n i n v e s t o r s , a n d t h

e l e v e l o f t h e i r fi n a n c i a l a n d l e

g a l d e v e l o p m e n t s .

G R O U P 1 i s l e a s t o p e n a n d d e v e l o p e d , a n d i n c l u d e s

L a t i n A m e r i c a n a n d A f r i c a n c o u n t r i e s i n

o u r s a m p l e .

G R O U P 2 i s m o r e o p e n a n d d e v e l o p e d , a n d i n c l u d e s I n d i a ,

C h i n a ,

E a s t e r n E u r o p e a n a n d

S o u t h e a s t A s i a n c o u n t r i e s . G R O U P 3 s

e r v e s a s t h e b a s e a n d i s t h e m o s t o p e n a n d d e v e l o p e d , a n d i n c l u d e s J a p a n ,

H o n g K o n g ,

C a n a d a ,

A u s t r a l i a , W e s t e r n E u r o p e a n c o u n t r i e s , a n d o t h e r o ff s h o r e i n v e s t m e n t

h u b s .




18/23

differences using country-specific data instead of country dummy variables.

The results, with details available from the authors upon request, continue to

be generally robust to these additional tests.13

6.2. Industry and financing stage

Venture capitalists investing in the first round may behave differently than

those investing in subsequent rounds, making it possible that the specific stage

in the financing of the portfolio company may produce different results. While

we have tested for the number of rounds, we have not done so for the specific

stage in the financing of the portfolio company. To examine the robustness of

our results to this factor, we add dummy variables to distinguish between

rounds, representing the start-up and seed stage, the early stage, and the laterstage (other stages are omitted to avoid multicollinearity). We also add as a

robustness test the nine main industry classification categories available in our

VentureXpert database, to control for any unobserved heterogeneity through

this more detailed industry classification. The results in Table 5, Panel A, are

generally robust to our earlier findings.

6.3. Heckman correction for selection bias

It is possible that there exists selection bias for the sub-sample used for

INTSUC, as there may exist an endogenous matching of successful companies

with more experienced VCs.14 We employ the Heckman correction (using

STATA) for the SUCCESS sub-sample to address this problem. The results,

shown in Table 5, Panel B are similar to the robustness check results for the

SUCCESS sub-sample in Table 5, Panel A.2. The main difference is that, after

correcting for endogeneity, the number of firms (NOFM ) and fund investments

(FDINV ) are significant at the 5 per cent level. The results in Table 5, Panel B

are generally robust to our earlier findings, although Rho is significant at the 1

13 The results, unreported to conserve space, suggest that country groupings – at leastwith respect to intercept dummies – are not that critical to determining the probabilitythat U.S. venture capitalists will invest internationally, or that if they do, they willexperience success. It thus seemed unlikely that introducing slope coefficients wouldproduce significantly different results. Also, while there was some possibility thatdiscrete shifts in the parameters generating the data were possible for the intercept forthe given country group differences, we were less confident about how countrydifferences might affect the sensitivity of the independent variables (such as monitoring,syndication or delegation) on the probability of going international or being successfulthrough changes in the slope parameters. Nevertheless, we tested for the sake of

completeness the use of slope dummy variables in the INTSUC regression, and foundthat all their respective coefficients were insignificant.

14 We thank the journal’s anonymous referee for pointing out this problem andsuggesting the Heckman correction procedure.




19/23

T a b l e 5

S t a g e s a n d i n d u s t r y r o b u s t n e s s c h e c k r e s u l t s f o r L O G I T r e g r e s s i o n I N T P R O B a n d I N T S U C , a n d H e c k m a n C o r r e c t i o n f o r I N T S U C

R o b u s t n e s s

P a n e l A : S t a g e s a n d i n d u s t r y

P a n e l B : H e c k m a

n

c o r r e c t i o n

R e g r e s s i o n

1 .

I N T P R O B

2 .

I N T S U C

I N T S U C

D e p e n d e n t

v a r i a b l e

I N T L

S U C C E S S

S U C C E S S

I n d e p e n d e n

t v a r i a b l e s

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o e ffi c i e n t

p - V a l u e

C o n s t a n t

1 . 5

7 7

0 . 0

0 0

2 . 2

7 5

0 . 0 0 0

1 . 7

6 4

0 . 0

0 0

F M A G E

0 . 0

2 3

0 . 0

0 0

0 . 0

1 1

0 . 0 1 1

0 . 0

1 8

0 . 0

0 0

C O A G E

0 . 0

0 2

0 . 3

7 3

0 . 0

2 2

0 . 0 0 0

0 . 0

1 2

0 . 0

0 0

R N D S

0 . 0

4 3

0 . 0

2 3

0 . 0

2 4

0 . 4 3 5

0 . 0

0 5

0 . 7

5 8

R N D S $

0 . 0

0 2

0 . 0

0 0

0 . 0

0 1

0 . 2 4 9

0 . 0

0 0

0 . 2

1 0

N O F M

0 . 1

4 8

0 . 0

0 0

0 . 0

2 7

0 . 2 0 7

0 . 0

2 6

0 . 0

3 0

F D I N V

0 . 0

0 3

0 . 0

0 0

0 . 0

0 6

0 . 1 7 7

0 . 0

0 6

0 . 0

3 1

E X E C %

0 . 0

0 4

0 . 0

0 2

0 . 0

0 9

0 . 0 0 0

0 . 0

5. when u.s. venture capital ventures abroad

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