Syndication Networks and the Spatial Distribution of Venture Capital Investments

Abstract

Sociological investigations of economic exchange reveal how institutions and social structures shape transaction patterns among economic actors. This article explores how interfirm networks in the U.S. venture capital (VC) market affect spatial patterns of exchange. Evidence suggests that information about potential investment opportunities generally circulates within geographic and industry spaces. In turn, the circumscribed flow of information within these spaces contributes to the geographic-and industry-localization of VC investments. Empirical analyses demonstrate that the social networks in the VC community-built up through the industry's extensive use of syndicated investing-diffuse information across boundaries and therefore expand the spatial radius of exchange. Venture capitalists that build axial positions in the industry's coinvestment network invest more frequently in spatially distant companies. Thus, variation in actors' positioning within the structure of the market appears to differentiate market participants' ability to overcome boundaries that otherwise would curtail exchange.

The impacts of fundraising periods and geographic distance on financing music production via crowdfunding in Brazil

“…These results support the arguments of Sorenson and Stuart (2001), Zook (2002), Stuart and Sorenson (2005), Mason (2007) and Martins (2015). In addition, they contradict the ideas proposed by Lee et al (2008), for whom the internet performs a sufficiently expressive role to make the distance between the entrepreneur and donor insignificant in terms of the ability of entrepreneurs to receive pledges for their projects.…”

“…They conclude that the online platform seems to eliminate most distance-related economic frictions, such as monitoring progress, providing input and gathering information; however, it does not eliminate social frictions. In the same line of thinking, a set of studies, e.g., Sorenson and Stuart (2001), Zook (2002), Mason (2007) and Martins (2015), assumes that investors in enterprises in their initial stages tend to demand more information, monitor the business's progress and also participate in decisions about how the business is run.…”

“…Based on a sample of American Venture Capitalism Firms, Sorenson and Stuart (2001) found that the probability of investing in a new venture falls with increasing geographical distance. Zook (2002) also found similar results to these authors' analysis for the American internet industry between 1994 and 2000.…”

Venture capitalists' confidence, capital commitments, and capital investments

“…And, performing a sociological investigation of syndication within the venture capital industry, Sorenson and Stuart find that "investors that build central positions in the syndication network concomitantly extend access to information about spatially distant targets and expand the radius of their investment activity." (Sorenson andStuart, 2001, p.1549) We offer that the increased knowledge that comes with this network centrality may also enhance overall confidence, thus bolstering the increased investment activity argument.…”

“…Other studies have examined the selection criteria that VCs use in choosing which start-ups companies to invest in MacMillan et al (1985), Hall and Hofer (1993), Jeng and Wells (2000), and Shepherd and Zacharakis (2002), the optimal portfolio size (in terms of companies funded) held by venture capital firms (Cumming, 2006;Bernile et al, 2007), and the syndication of VC investments (Wilson, 1968;Lerner, 1994a;Lockett and Wright, 2001;Sorenson and Stuart, 2001;Wright and Lockett, 2003;Manigart et al, 2006;Hochberg et al, 2007), among a network of venture capital firms, but these studies have not linked these investment decisions to the underlying confidence that VCs held in the entrepreneurial environment. Again, we reasoned that VC confidence may have an important impact on the total capital investment in their portfolio firms and, thus, the availability of financing for high-growth ventures.…”