Bridge over ocean
1 November 2006 Financial Analysts Journal Volume 62, Issue 6

Home-State Investment Bias in Venture Capital Funds

  1. Adam Lichtenstein

A widespread assumption is that U.S. venture capitalists source their best investments locally, so out-of-state venture funds are at a disadvantage in relation to local competitors. This assumption drives most venture funds to focus their investments on local companies. The study reported here tested this hypothesis by analyzing IPO rates by the state of venture-funded companies for the past 25 years. Locally funded companies actually achieved a lower average IPO rate than that of nationally funded companies. Therefore, venture funds should seek to capitalize on any local advantage but should also seek to balance their investments by diversifying geographically.

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