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 architecture of transaction networks: a comparative analysis of hierarchy in two sectors

“…This has resulted in a growing body of literature aimed at understanding inter-firm networks in general and their effects on firm performance (Gulati, 1995(Gulati, , 1998Sorenson and Stuart, 2001;Rosenkopf and Schilling, 2007;Schilling and Phelps, 2007).…”

Syndication of Venture Capital Investment: The Art of Resource Pooling

“…Several scholars in economic sociology emphasize that social networks are efficient for reducing uncertainty before VC investments (Sorenson & Stuart, 2001). Business evaluation of companies, especially new businesses, is an archetypal situation where social networks are a more efficient way to get information than from the market.…”

Community development venture capital: concept and status quo in Germany

“…This hypothesized importance of spatial proximity has been supported by different international empirical studies, arguing that VC companies predominantly invest in nearby targets (Powell et al, 2002;Sorenson and Stuart, 2001;Cumming and Johan, 2006).…”

“…These processes are facilitated through face-to-face contacts as well as exchanging information and know-how within small distances. Moreover, after a deal has been closed hands-on support very often requires spatial proximity in order to enable a VC company to provide support and to monitor actions undertaken by the entrepreneur (Lerner, 1995;Sorenson and Stuart, 2001). …”

“…For instance, it could be argued that companies in an earlier phase of development are exposed to a higher risk of failure and need more management support by the VC company. This could lead to a higher importance of spatial proximity between investor and portfolio company (Sorenson and Stuart, 2001). Hence, there could be some regional VC gaps, which are especially severe for certain VC and portfolio companies.…”