Prof Deepak Hegde Finds VCs Do Better Investing in Start-Ups Run by Entrepreneurs of Same Ethnicity
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
The article, "Does Social Proximity Enhance Business Partnerships? Theory and Evidence from Ethnicity’s Role in US Venture Capital” is forthcoming in the journal Management Science.
To speak with Professor Hegde, please contact Carolyn Ritter at 212-998-0624 or email@example.com or Joanne Hvala at 212-998-0995 or firstname.lastname@example.org in NYU Stern’s Office of Public Affairs.
Carolyn Ritter, 212-998-0624
Joanne Hvala, 212-998-0995
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