Contradicting conventional wisdom, a new study finds that venture capital investors reap greater returns on portfolio companies based away from their home cities than those situated locally.
Venture capital firms in San Francisco, Boston and New York generated better returns from their distant investments between 1975 and 2005, according to the paper by Josh Lerner, the Jacob H. Schifff Professor of Investment Banking, Harvard Business School, Boston.
The paper, “Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion,” was written with Paul A. Gompers, Eugene Holman Professor of Business Administration, Harvard Business School; Anna Kovner , economist, financial intermediation function, Federal Reserve Bank of New York; and Henry Chen, research associate, Harvard Business School. They found that the distant investments produced higher returns regardless of whether the portfolio company is a startup or a going concern. This means that the venture capital executives were not “cherry-picking” later-stage companies with healthy cash flows and products, the paper concludes.
Investments made by firms in what the authors dubbed the venture capital center cities of San Francisco, Boston and New York that were farther away returned 19%, beating out a 17.3% return for investments made closer to one of these center cities.
The average success rates for investments close to the firms' headquarters is 14.5%, compared with 17% close to branch and outside offices. — Arleen Jacobius