Dear Colleagues,
Our next virtual seminar in the Entrepreneurship and Innovation Policy Research series Wednesday, October 9, from 11:00-12:00 ET. Jay Habegger (University of Maryland) - will present "Searching in the dark: Regional disparities in startups' initial equity financings" (with F Honore and R Aggarwal). Abstract is below. Click the link HERE to register for the 9/18 seminar.
We hope you join us!
- Tim Folta (UCONN), Maryann Feldman (ASU), and Supradeep Dutta (Rutgers U)
Abstract: We investigate the differences in financial outcomes between startups in Venture Capital hubs (i.e., Silicon Valley, Boston, and NYC) and elsewhere to explore the efficiency of fungible financial capital allocation to comparatively immobile human capital. Annually, there are as many early-stage first equity investments in VC Hub startups as in non-VC Hub startups. Do non-VC Hub entrepreneurs pay a price for their immobility? Prior work might have assumed that the best startups would relocate to VC hubs or that VCs finance these remote startups through syndication (i.e., partnerships between several VC firms). We question these assumptions in an abductive analysis that documents the differences between startups' financing transactions based on location. To do so, we collected information on the entire population of US early-stage initial equity financing transactions from 1992 to 2019 and assembled a dataset of 19,275 transactions. Specifically, we find that non-VC Hub startups often contract with fewer conventional VCs and more non-local investors. In contrast, they are more likely to receive funding from a government entity, university funds, or corporate VC. Non-VC Hub startups raise less capital in their initial equity financing, engage fewer investors, and take longer to complete the transaction than VC Hub startups. Our analyses suggest that non-VC hub startups incur high search costs, negatively affecting their financing outcomes. Our study also shows that explanations such as sorting based on startups' quality, agglomeration, ecosystems, and VC syndication and monitoring do not fully explain the results.