There are inevitable risks involved in investing in startups from outside of your region, but data suggests cross-border VC investment is on the rise. New research from Wharton explores why this is happening, and especially the role immigrants are playing in these international investments.
The authors state that cross-border VC investment is now at record levels, with this in large part due to the increasingly international nature of entrepreneurship. It represents a significant change however, as previous research has shown that for a long time, VC investments would often be made within about 60 miles of the VC’s headquarters. Investors would largely stay within the confines of their city or region.
This super-localization of investing occurred in large part because obtaining good information about startups was historically very hard. Even knowing a startup existed might have been difficult in the past, unless you were able to attend local events and hear the local gossip. This proximity then allows you to meet with founders, and track the progress of your investment.
Global investments
When the pattern of investments was analyzed, there didn’t appear to be any discernible trend in where VCs put their money. That was until the researchers began exploring the origins of the entrepreneurs themselves. It appeared that when a VC backed a startup with immigrant founders, they subsequently became more enthusiastic about backing other startups from the founders homeland.
The immigrant founders would facilitate this process due to the local knowledge of their homeland, and the connections they have within it, that they were able to share, both explicitly and implicitly with their investors. Indeed, in many ways this is a logical extension of the phenomenon whereby investors source future investments from their existing portfolio.
The findings emerged after analyzing the investments made by U.S.-based VC firms into Indian startups. It transpired that the VCs were much more likely to do this when they had already invested in American startups that had been founded by Indian entrepreneurs, although interestingly this only worked when the entrepreneurs were first-generation immigrants, and therefore had stronger, and more recent, ties with the country.
Global knowledge
The researchers also examined how investments differ if the VC themselves have immigrants among their management team. It seems logical to assume that having a number of Indians (for example) in the management team would facilitate greater investments in India, but while in general that was true, it was not quite as straightforward as that.
Whereas VCs tended to invest more in the homeland of migrant entrepreneurs if they were first-generation migrants, this was not the case when the migrants were on the management team of the VC itself. Indeed, in that instance, first-generation migrants weren’t especially receptive to investing in their homeland.
There wasn’t any noticeable reason for this, but the researchers believe it might be that second-generation migrants retain an interest in their homeland, but lack the direct connections that their first-generation peers share. So a combination of interested managers and connected entrepreneurs results in high levels of investment.
The results clearly show that as well as migration helping to diffuse ideas and invention across borders, it also diffuses capital too. The data suggests that an understanding of the backgrounds of founders and the management team of a VC can be strong indicators as to where that VC may deploy their funds in future, which is surely of great interest for jurisdictions looking to make use of their diaspora in attracting inward investment.
Suffice to say, this is not a process that provides an immediate payoff, but it nonetheless adds a fresh level of nuance to discussions around the merits of migration to entrepreneurship and innovation.
