Venture Capitalists Do Better Investing in Start-Ups Run by Entrepreneurs of Same Ethnicity
By Deepak Hegde
VCs are systematically more likely to invest in start-ups when the VC and start-up have top-level executives of the same ethnicity.
The professors analyzed data from almost all US-based venture deals from 1991-2010, assembling 22,000 US-based venture capital (VC) partners and 85,000 US based start-up executives, who represent 10 distinct ethnic groups.
Key insights from the paper include:
- VCs are systematically more likely to invest in start-ups when the VC and start-up have top-level executives of the same ethnicity
- VCs are more likely to favor co-ethnic entrepreneurs for investment during early investment rounds
- Some ethnic groups (e.g., Chinese, Indian, Jewish and South European) favor co-ethnic investments more than others (e.g., Anglo-Saxon or West European)
- The chance of a successful IPO or acquisition and post-IPO or acquisition performance is higher when VC and company share same ethnicity, and the enhanced performance persists
- Within a VC’s portfolio, ethnically closer start-ups perform better
- The positive performance of start-ups is largely due to superior communication and coordination between VCs and entrepreneurs of the same ethnicity after the investment
- To the extent that VCs expect to work better with startups with co-ethnic leaders, they invest in co-ethnic ventures of lower observable quality than non-co-ethnic ventures