Ethnic Enclave and Entrepreneurial Financing: Asian Venture Capitalists in Silicon Valley

Abstract

Research summary: We examine the dilemma of ethnic investors in using ethnic network ties to invest by extending the 'ethnic enclave' concept to incorporate two dimensions: social network and social status. Our analysis of the first round of venture capital funding in Silicon Valley from 1976 to 2004 shows a higher likelihood of Asian venture capitalists (VCs) investing in Asian-led ventures than mainstream VCs. In addition, the valuation of their investments in mainstream ventures is higher than those by mainstream VCs in such ventures. In contrast, this premium effect is not observed when mainstream VCs invest in Asian ventures. These asymmetrical findings suggest the premium Asian VCs pay to compete in the mainstream venture market is due to their lower social status rather than their social network disadvantages. Managerial summary: Do ethnic minority investors behave differently from more mainstream investors? We examine this question by studying the venture capital industry in Silicon Valley over the period 1976 to 2004. We found that Asian venture capitalists (VCs) were more likely to invest in immigrant Asian entrepreneurs than mainstream VCs, and when they did invest in mainstream ventures, they paid higher valuations than mainstream VCs. In contrast, mainstream VCs did not pay higher average valuations compared to Asian VCs when they invested in Asian ventures. We show that two social factors-the ethnic minority VCs' social network ties and their lower social status-could have contributed to such behavioral differences.

A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation

“…In general, we focus on financing rounds where CVCs invest in a startup for the first time rather than on follow-on rounds, as the initial investment round is when the impact of CVC investment motivation might be expected to be most pronounced (see also Zhang et al 2016). In cases where multiple CVCs initially invested in the same investment round, we followed Masulis and Nahata (2009) and treated each CVC-startup dyad separately.…”

Transnational entrepreneurship, social networks, and institutional distance

“…Receiving such endorsements from nonethnic social networks is more instrumental than the ones from ethnic ties. TEs may employ ethnic rotating credit associations (Aldrich and Waldinger, 1990) or ethnic venture capitals (Zhang et al, 2016) to raise financial resources necessary to seize opportunities (Moghaddam, Tabesh, Weber and Azarpanah, 2017). Strong social ties facilitate the creation of the human capital (Acquaah, 2007;Coleman, 1988;Leana and Van Buren, 1999) necessary to seize opportunities and manage the business in the COR.…”

The Importance of Cross-Cultural Capabilities for Chinese Immigrant Entrepreneurs in Australia

“…Although the importance of adaptation for immigrant entrepreneurs has been identified in immigrant entrepreneurship literature, specifically with regards to economic adaptation (e.g., Drori, Honig, & Wright, 2009;Light, 1979;Light, 1972;Portes et al, 2002) and social adaptation (e.g., Ndofor & Priem, 2011;Zhang, Wong, & Ho, 2016;Zolin et al, 2015), research into cultural adaptation to a host country (destination country) is still limited. In recent years, research highlighting the importance of a specific skill, such as language, has grown (e.g., Azmat & Fujimoto, 2016;Kolb et al, 2001;Sui et al, 2015).…”

“…Recently, the study of ethnic enclaves has extended to the behaviour of ethnic venture investors (Zhang et al, 2016).…”

“…As the co-ethnic network provides an opportunity to help co-ethnic group members, it is considered a platform to establish mutual trust in the community, which can be built into successful enterprises (Portes & Sensenbrenner, 1993;Zhang et al, 2016). A study that focused on Chinese immigrant entrepreneurs by Zhou (1998) explored that the network within ethnic enclaves determines the nature of immigrant businesses.…”