Skip to main content

Advertisement

SpringerLink
Log in

The role of domestic and cross-border venture capital investors in the growth of portfolio companies

  • Published:
Small Business Economics Aims and scope Submit manuscript

Abstract

This paper studies how the presence of cross-border as opposed to domestic venture capital investors is associated with the growth of portfolio companies. For this purpose, we use a longitudinal research design and track sales, total assets and payroll expenses in 761 European technology companies from the year of initial venture capital investment up to seven years thereafter. Findings demonstrate how companies initially backed by domestic venture capital investors exhibit higher growth in the short term compared to companies backed by cross-border investors. In the medium term, companies initially backed by cross-border venture capital investors exhibit higher growth compared to companies backed by domestic investors. Finally, companies that are initially funded by a syndicate comprising both domestic and cross-border venture capital investors exhibit the highest growth. Overall, this study provides a more fine-grained understanding of the role that domestic and cross-border venture capital investors can play as their portfolio companies grow and thereby require different resources or capabilities over time.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. The time frame of our study (seven years) covers the typical lifespan of venture capital investments which is between three and seven years.

  2. We also developed count variables measuring the number of venture capital investors, rather than dummy variables. Results remained robust. As the use of dummy variables fits better with the theoretical arguments, we focus on the analyses with the dummy variables in the remainder of the paper. For instance, it may be sufficient to have one domestic venture capital investor investing together with one cross-border venture capital investor to diminish the information asymmetries experienced by the latter.

  3. Traditional longitudinal techniques require either complete data or assume data are missing completely at random (MCAR), implying that an unconditional random process is responsible for the missing data. A major advantage of the RCM framework is that, missing data can be accommodated under the assumption of missing at random (MAR) (Long et al. 2009). MAR is less strict than MCAR and implies that a conditional random process was responsible for the missing data. The conditioning is assumed to be on another variable. In this study, the bulk of missing sales data at the end of the time frame are due to the recent time when companies received initial venture capital. For instance, when a company received initial venture capital in 2004, data is simply unavailable for seven years after the initial investment. MAR still yields unbiased estimates when using the RCM framework as long as the proper conditioning variables are included in the analysis, which is the case in our study as we control for the investment year.

  4. The predicted growth curves for total assets and payroll expenses are not included due to space considerations, but are available from the authors upon simple request.

  5. The additional models are not reported in detail due to space considerations, but they are available from the authors upon request.

  6. There is one exception: companies getting cross-border venture capital in a later round exhibit a subsequent larger increase in total assets. This is not surprising as this larger increase in total assets is likely to reflect the investment by the cross-border venture capital investor.

  7. Inclusion of the U.K. portfolio companies rendered similar results.

References

  • Alhorr, H. S., Moore, C. B., & Payne, G. T. (2008). The impact of economic integration on cross-border venture capital investments: Evidence from the European Union. Entrepreneurship Theory and Practice, 32(5), 897–917.

    Article  Google Scholar 

  • Arthurs, J. D., & Busenitz, L. W. (2006). Dynamic capabilities and venture performance: The effects of venture capitalists. Journal of Business Venturing, 21(2), 195–215.

    Article  Google Scholar 

  • Barney, J. B. (1986). Organizational culture: Can it be a source of sustained competitive advantage? The Academy of Management Review, 11(3), 656–665.

    Google Scholar 

  • Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120.

    Article  Google Scholar 

  • Baum, J. A. C., & Silverman, B. S. (2004). Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups. Journal of Business Venturing, 19(3), 411–436.

    Article  Google Scholar 

  • Bertoni, F., Colombo, M. G., & Grilli, L. (2011). Venture capital financing and the growth of high-tech start-ups: Disentangling treatment from selection effects. Research Policy, 40(7), 1028–1043.

    Article  Google Scholar 

  • Bliese, P. D., & Ployhart, R. E. (2002). Growth modeling using random coefficient models: Model building, testing, and illustrations. Organizational Research Methods, 5(4), 362–387.

    Article  Google Scholar 

  • Brander, J. A., Amit, R., & Antweiler, W. (2002). Venture-capital syndication: Improved venture selection versus the value-added hypothesis. Journal of Economics & Management Strategy, 11(3), 423–452.

    Article  Google Scholar 

  • Bruneel, J., Yli-Renko, H., & Clarysse, B. (2010). Learning from experience and learning from others: How congenital and interorganizational learning substitute for experiential learning in young firm internationalization. Strategic Entrepreneurship Journal, 4(2), 164–182.

    Article  Google Scholar 

  • Bruton, G. D., Fried, V. H., & Manigart, S. (2005). Institutional influences on the worldwide expansion of venture capital. Entrepreneurship Theory and Practice, 29(6), 737–760.

    Article  Google Scholar 

  • Carpenter, M. A., Pollock, T. G., & Leary, M. M. (2003). Testing a model of reasoned risk-taking: Governance, the experience of principals and agents, and global strategy in high-technology IPO firms. Strategic Management Journal, 24(9), 803–820.

    Article  Google Scholar 

  • Cassar, G. (2004). The financing of business start-ups. Journal of Business Venturing, 19(2), 261–283.

    Article  Google Scholar 

  • Chandler, G. N., & Hanks, S. H. (1994). Market attractiveness, resource-based capabilities, venture strategies, and venture performance. Journal of Business Venturing, 9(4), 331–349.

    Article  Google Scholar 

  • Chemmanur, T. J., Hull, T., & Krishnan, K. (2011). Do local and international venture capitalists play well together? A Study of International Venture Capital Investments. Working paper, SSRN eLibrary.

  • Clarysse, B., Knockaert, M., & Lockett, A. (2007). Outside board members in high tech start-ups. Small Business Economics, 29(3), 243–259.

    Article  Google Scholar 

  • Cooper, A. C., Gimenogascon, F. J., & Woo, C. Y. (1994). Initial human and financial capital as predictors of new venture performance. Journal of Business Venturing, 9(5), 371–395.

    Article  Google Scholar 

  • Coviello, N. E., & Munro, H. J. (1995). Growing the entrepreneurial firm: Networking for international market development. European Journal of Marketing, 29, 49–61.

    Article  Google Scholar 

  • Cumming, D., & Dai, N. (2010). Local bias in venture capital investments. Journal of Empirical Finance, 17(3), 362–380.

    Article  Google Scholar 

  • Cumming, D. J., & MacIntosh, J. G. (2001). Venture capital investment duration in Canada and the United States. Journal of Multinational Financial Management, 11(4–5), 445–463.

    Article  Google Scholar 

  • Dai, N., Jo, H., & Kassicieh, S. K. (2011). Cross-Border Venture Capital Investments in Asia: Selection and Performance. Journal of Business Venturing (forthcoming).

  • De Clercq, D., & Dimov, D. (2008). Internal knowledge development and external knowledge access in venture capital investment performance. Journal of Management Studies, 45(3), 585–612.

    Article  Google Scholar 

  • Delmar, F., Davidsson, P., & Gartner, W. B. (2003). Arriving at the high-growth firm. Journal of Business Venturing, 18(2), 189–216.

    Article  Google Scholar 

  • Eckhardt, J. T., Shane, S., & Delmar, F. (2006). Multistage selection and the financing of new ventures. Management Science, 52(2), 220–232.

    Article  Google Scholar 

  • Fernhaber, S. A., & McDougall-Covin, P. P. (2009). Venture capitalists as catalysts to new venture internationalization: The impact of their knowledge and reputation resources. Entrepreneurship Theory and Practice, 33(1), 277–295.

    Article  Google Scholar 

  • Fitzmaurice, G. M., Laird, N. M., & Ware, J. H. (2004). Applied longitudinal analysis. New Jersey: Wiley.

    Google Scholar 

  • Fritsch, M., & Schilder, D. (2008). Does venture capital investment really require spatial proximity? An empirical investigation. Environment and Planning A, 40(9), 2114–2131.

    Article  Google Scholar 

  • Gompers, P. A. (1996). Grandstanding in the venture capital industry. Journal of Financial Economics, 42(1), 133–156.

    Article  Google Scholar 

  • Guler, I., & Guillen, M. F. (2010a). Institutions and the internationalization of US venture capital firms. Journal of International Business Studies, 41(2), 185–205.

    Article  Google Scholar 

  • Guler, I., & Guillen, M. F. (2010b). Home country networks and foreign expansion: Evidence from the venture capital industry. Academy of Management Journal, 53(2), 390–410.

    Article  Google Scholar 

  • Gupta, A. K., & Sapienza, H. J. (1992). Determinants of venture capital firms preferences regarding the industry diversity and geographic scope of their investments. Journal of Business Venturing, 7(5), 347–362.

    Article  Google Scholar 

  • Hand, J. R. M. (2005). The value relevance of financial statements in the venture capital market. Accounting Review, 80(2), 613–648.

    Article  Google Scholar 

  • Heirman, A., & Clarysse, B. (2004). How and why do research-based start-ups differ at founding? A resource-based configurational perspective. The Journal of Technology Transfer, 29(3), 247–268.

    Article  Google Scholar 

  • Hellmann, T., Lindsey, L., & Puri, M. (2008). Building relationships early: Banks in venture capital. Review of Financial Studies, 21(2), 513–541.

    Article  Google Scholar 

  • Holcomb, T. R., Combs, J. G., Sirmon, D. G., & Sexton, J. (2010). Modeling levels and time in entrepreneurship research an illustration with growth strategies and post-IPO performance. Organizational Research Methods, 13(2), 348–389.

    Article  Google Scholar 

  • Hsu, D. & Ziedonis, R.H., (2008). Patents as quality signals for entrepreneurial ventures, Academy of Management Best Papers Proceedings. Ross School of Business at the University of Michigan.

  • Hursti, J., & Maula, M. W. (2007). Acquiring financial resources from foreign equity capital markets: An examination of factors influencing foreign initial public offerings. Journal of Business Venturing, 22(6), 833–851.

    Article  Google Scholar 

  • Jääskeläinen, M. (2009). Venture capital syndication: Synthesis and future directions, Working Paper Helsinki University of Technology, Espoo, p. 42.

  • Knight, G. A., & Cavusgil, S. T. (2004). Innovation, organizational capabilities, and the born-global firm. Journal of International Business Studies, 35(2), 124–141.

    Article  Google Scholar 

  • Lee, C., Lee, K., & Pennings, J. M. (2001). Internal capabilities, external networks, and performance: A study on technology-based ventures. Strategic Management Journal, 22(6–7), 615–640.

    Article  Google Scholar 

  • Litvak, I. (1990). Instant international: Strategic reality for small high-technology firms in Canada. Multinational Business, 2(Summer), 1–12.

    Google Scholar 

  • Lockett, A., Wright, M., Burrows, A., Scholes, L., & Paton, D. (2008). The export intensity of venture capital backed companies. Small Business Economics, 31(1), 39–58.

    Article  Google Scholar 

  • Long, J. D., Loeber, R., & Farrington, D. P. (2009). Marginal and random intercepts models for longitudinal binary data with examples from criminology. Multivariate Behavioral Research, 44(1), 28–58.

    Article  Google Scholar 

  • Lu, Q., & Hwang, P. (2010). The impact of liability of foreignness on international venture capital firms in Singapore. Asia Pacific Journal of Management, 27(1), 81–97.

    Article  Google Scholar 

  • Lutz, E. & George, G. (2010). Entrepreneurial Aspiration and Resource Provisioning: The Role of Venture Capital in New Venture Internationalization. Working Paper, SSRN eLibrary.

  • Madhavan, R., & Iriyama, A. (2009). Understanding global flows of venture capital: Human networks as the “carrier wave’’ of globalization. Journal of International Business Studies, 40(8), 1241–1259.

    Article  Google Scholar 

  • Mäkelä, M., & Maula, M. V. (2005). Cross-border venture capital and new venture internationalization: An isomorphism perspective. Venture Capital: An International Journal of Entrepreneurial Finance, 7(3), 227–257.

    Article  Google Scholar 

  • Mäkelä, M. M., & Maula, M. V. J. (2006). Interorganizational commitment in syndicated cross-border venture capital investments. Entrepreneurship Theory and Practice, 30(2), 273–298.

    Article  Google Scholar 

  • Mäkelä, M. M., & Maula, M. V. J. (2008). Attracting cross-border venture capital: The role of a local investor. Entrepreneurship and Regional Development, 20(3), 237–257.

    Article  Google Scholar 

  • Manigart, S., Lockett, A., Meuleman, M., Wright, M., Landstrom, H., Bruining, H., et al. (2006). Venture capitalists’ decision to syndicate. Entrepreneurship Theory and Practice, 30(2), 131–153.

    Article  Google Scholar 

  • McDougall, P. P., Shane, S., & Oviatt, B. M. (1994). Explaining the formation of international new ventures-the limits of theories from international business research. Journal of Business Venturing, 9(6), 469–487.

    Article  Google Scholar 

  • Meuleman, M., & Wright, M. (2011). Cross-border private equity syndication: Institutional context and learning. Journal of Business Venturing, 26(1), 35–48.

    Article  Google Scholar 

  • Moser, S. (2010). Does Diversity Among Co-Investing Venture Capitalists Add Value for Entrepreneurial Companies? Dissertation Executive Summary. SSRN eLibrary.

  • Newbert, S. L. (2005). New firm formation: A dynamic capability perspective. Journal of Small Business Management, 43(1), 55–77.

    Article  Google Scholar 

  • Oviatt, B. M., & McDougall, P. P. (1994). Toward a theory of international new ventures. Journal of International Business Studies, 25(1), 45–64.

    Article  Google Scholar 

  • Penrose, E. T. (1958). The theory of the growth of the firm. New York: Wiley.

    Google Scholar 

  • Pruthi, S., Wright, M., & Lockett, A. (2003). Do foreign and domestic venture capital firms differ in their monitoring of investees? Asia Pacific Journal of Management, 20(2), 175–204.

    Article  Google Scholar 

  • Pruthi, S., Wright, M., & Meyer, K. (2009). Staffing venture capital firms’ international operations. International Journal of Human Resource Management, 20(1), 186–205.

    Article  Google Scholar 

  • Puri, M., & Zarutskie, R. (2011). On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms. Journal of Finance (forthcoming).

  • Sapienza, H. J. (1992). When do venture capitalists add value. Journal of Business Venturing, 7(1), 9–27.

    Article  Google Scholar 

  • Sapienza, H. J., Manigart, S., & Vermier, W. (1996). Venture capitalist governance and value added in four countries. Journal of Business Venturing, 11(6), 439–469.

    Article  Google Scholar 

  • Sapienza, H. J., Autio, E., George, G., & Zahra, S. A. (2006). A capabilities perspective on the effects of early internationalization on firm survival and growth. Academy of Management Review, 31(4), 914–933.

    Article  Google Scholar 

  • Shane, S., & Stuart, T. (2002). Organizational endowments and the performance of university start-ups. Management Science, 48(1), 154–170.

    Article  Google Scholar 

  • Shaver, J. M. (1998). Accounting for endogeneity when assessing strategy performance: Does entry mode choice affect FDI survival? Management Science, 44(4), 571–585.

    Article  Google Scholar 

  • Singer, J. D., & Willett, J. B. (2003). Applied Longitudinal data analysis: Modeling change and event occurrence. New York: Oxford University Press.

    Book  Google Scholar 

  • Sorensen, M. (2007). How smart is smart money? A two-sided matching model of venture capital. Journal of Finance, 62(6), 2725–2762.

    Article  Google Scholar 

  • Sorenson, O., & Stuart, T. E. (2001). Syndication networks and the spatial distribution of venture capital investments. American Journal of Sociology, 106(6), 1546–1588.

    Article  Google Scholar 

  • Stinchcombe, A. L. (1965). Social structures and organizations. In J. G. March (Ed.), Handbook of organizations (pp. 142–193). Chicago: Rand-McNally.

    Google Scholar 

  • Stuart, T. E., Hoang, H., & Hybels, R. C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44(2), 315–349.

    Article  Google Scholar 

  • Vanaelst, I., Clarysse, B., Wright, M., Lockett, A., Moray, N., & S’Jegers, R. (2006). Entrepreneurial team development in academic spinouts: An examination of team heterogeneity. Entrepreneurship Theory and Practice, 30(2), 249–271.

    Article  Google Scholar 

  • Villalonga, B. (2004). Intangible resources, Tobin’s q, and sustainability of performance differences. Journal of Economic Behaviour & Organization, 54(2), 205–230.

    Article  Google Scholar 

  • Vohora, A., Wright, M., & Lockett, A. (2004). Critical junctures in the development of university high-tech spinout companies. Research Policy, 33(1), 147–175.

    Article  Google Scholar 

  • Weinzimmer, L. G., Nystrom, P. C., & Freeman, S. J. (1998). Measuring organizational growth: Issues, consequences and guidelines. Journal of Management, 24(2), 235–262.

    Google Scholar 

  • Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171–180.

    Article  Google Scholar 

  • Wright, M., Lockett, A., & Pruthi, S. (2002). Internationalization of western venture capitalists into emerging markets: Risk assessment and information in India. Small Business Economics, 19(1), 13–29.

    Article  Google Scholar 

  • Yli-Renko, H., Autio, E., & Tontti, V. (2002). Social capital, knowledge, and the international growth of technology-based new firms. International Business Review, 11(3), 279–304.

    Article  Google Scholar 

  • Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2), 341–363.

    Article  Google Scholar 

  • Zahra, S. A., Sapienza, H. J., & Davidsson, P. (2006). Entrepreneurship and dynamic capabilities: A review, model and research agenda. Journal of Management Studies, 43(4), 917–955.

    Article  Google Scholar 

  • Zahra, S. A., Neubaum, D. O., & Naldi, L. (2007). The effects of ownership and governance on SMEs’ international knowledge-based resources. Small Business Economics, 29(3), 309–327.

    Article  Google Scholar 

Download references

Acknowledgments

We are grateful to Mikko Jääskeläinen, Helena Yli-Renko, Tereza Tykvová, Uwe Walz, Michele Meoli, the editor Mike Wright and two anonymous reviewers for their helpful feedback. This paper further benefited from presentations at the 2010 Babson College Entrepreneurship Research Conference, the 2010 Academy of Management Meeting, the 2011 inaugural private equity forum and the 2011 VICO workshop. A prior version of this paper was selected for publication in the 2010 edition of Frontiers of Entrepreneurship Research. We acknowledge the data collection support of all VICO partners. Financial support of the EU VII Framework Programme (VICO, Contract 217485), the Hercules Fund (Ghent University), Special Research Fund (BOF10/PDO/046), and the Vlerick Academic Research Fund is also gratefully acknowledged.

Author information

Authors and Affiliations

  1. Competence Centre Accounting & Finance, Vlerick Business School, Reep 1, 9000, Ghent, Belgium

    David Devigne & Sophie Manigart

  2. Department of Accounting & Corporate Finance, Ghent University, Kuiperskaai 55E, 9000, Ghent, Devigne

    Tom Vanacker, Sophie Manigart & Ine Paeleman

Authors
  1. David Devigne
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Tom Vanacker
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Sophie Manigart
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Ine Paeleman
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to David Devigne.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Devigne, D., Vanacker, T., Manigart, S. et al. The role of domestic and cross-border venture capital investors in the growth of portfolio companies. Small Bus Econ 40, 553–573 (2013). https://doi.org/10.1007/s11187-011-9383-y

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11187-011-9383-y

Keywords

JEL Classifications

Search

Navigation