Study on the Effects and Economic Consequences of Social Network Relationship on Venture Capital Investment Behavior: An Empirical Analysis from a Perspective of Geography

Hu Liufen, Zhou Zejiang

Foreign Economics & Management Vol. 40, Issue 04, pp. 110 - 124 (2018)  DOI:10.16538/j.cnki.fem.2018.04.009

Summary

Unlike other forms of financial investment, venture capital is usually targeted at high-tech SMEs at early development stage. Such enterprises do not have open information disclosure channel and a long history of development for investors to refer to, resulting in serious information asymmetry between venture capital firms and these enterprises. In addition, venture capital not only gives financial support to enterprises, but also provides different kinds of value-added services, including venture capitalists’ involvement in the operation and management of enterprises（Hellmann and Puri, 2002; Baker and Gompers, 2003）. These factors lead to " local bias” of venture capital investment, namely VC firms prefer to select those enterprises which are close to them as investment objects. This phenomenon of " localization” is closely related to the flow of information. On the one hand, it is not easy for venture capital to gain long-distance investment opportunities. Even with the information related to investment objects, its accuracy and completeness must decline by a big margin. On the other hand, it is very difficult for venture capital to make an accurate assessment of project quality due to asymmetric information, and geographical distance aggravates this situation, which is equivalent to an increase in investment risk. 　　Therefore, this paper empirically tests the impacts and economic consequences of syndication network on venture capital investment behavior from the perspective of geography in Chinese market. The results show that the good network relationship of venture capital firms can help to expand the geographical scope of their investment and has a significantly positive effect on the exit performance of long-distance venture capital investment. Specifically speaking, venture capital firms at the better centralized network location have the wider geographical scope of investment. Then the successful exit likelihood of long-distance investment will be greater and the time required from investment to successful exit will be shorter. Further research indicates that the positive impact of network relationship is a combining result of " selection” and " value-addition” functions. Similar to syndication network, syndication strategy also affects the investment behavior and performance of venture capital firms. According to the results of this paper, VC firms can reduce the sensitivity to regions and enhance the " soft power” of expanding their investments to other provinces or farther districts through strengthening relations with peers and improving the position in syndication networks, which effectively alleviate the problems of over-concentration of venture capital and overpressure of regional competition.

Keywords

social network; venture capital; geographical scope; exit performance; functioning mechanism