A Harvard Business School study out today:
Found that VC firms based in San Francisco, Boston and New York generally return more money on investments outside of their local geographies than on investments close to home.
The academics offer an explanation for this:
The paper suggests that this differential could be caused by VC firms using higher hurdle rates for long-distance deals. Such portfolio companies may require a higher level of managerial/monitoring effort, so more thought is given before offering up a term sheet.
Another explanation that many entrepreneurs would give: when you are far away, it’s harder to meddle with the company, telling them to outsource to india, create a facebook app, or whatever the trend du jour is.
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I run my own unconventional jewelry design firm not in need of VC. But, my first career was in corporate America, and part of my business is on etsy.com, so I find this subject interesting. As a non participant observer I also find VC advice not always in tune with the real mission of a firm.
Some startups fail because they lost discipline. Why people try to do things differently all the time, it’s hard to focus on their core values. Companies can keep their mind focus when operating further away from VC.
I suspect one of the reasons for this is the lower cost of doing businesses in cities other than those listed which are unarguably among those with the highest cost of doing business in the U.S. Companies in cities outside these hubs will be significantly lower burn rates – the investment goes further therefore increasing the odds for success. It’s one of the reasons why Burrill is looking to invest in Minnesota.
–Lee
http://www.celltherapyblog.com
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