The Role of Geographic Proximity in Venture Capital

In practice, venture capital (VC) is not about the people you know, but rather where you are. Some VCs even make their investment decisions based on the "twenty-minute rule," which is that if a start-up company seeking venture capital is not within a twenty-minute drive of VCs' offices, it will not be funded. Generally speaking, both theoretical work and empirical evidence is consistent with these recent observations in the popular press. However, prior evidence on local bias in venture capital markets has not fully investigated how local bias depends on VCs' characteristics. Further, whether and how local bias differs for VC markets versus other forms of financial intermediation has not been fully considered. As well, there is no or little empirical evidence on the performance implications of local bias, which should be important for the diversification and specialization issue in VC fund management. This article aims to fill this gap. First, it discusses relevant theory and develops empirically testable predictions, and then describes the sample and data employed in this study. It develops measures of local bias in VC investments and examines whether there is local bias in VC investments. Next it analyzes the factors that contribute to local bias and links the geographic distance to VC investment performance. The last section summarizes the main findings.