Ola Bengtsson and David H. Hsu ()
Abstract: We document that ethnicity is a major determinant of how founders of U.S. startup companies match with partners of U.S. VC firms. A shared ethnicity increases the likelihood that a VC firm invests in a startup, strengthens the degree of the VC firm’s involvement, increases the size and scope of the investment, and makes the financial contract more entrepreneur-friendly. These findings are robust to specifications with VC firm or startup company fixed effects. Based on our finding that a shared ethnicity is associated with worse investment outcomes (IPO or M&A), we infer that a VC partner may overestimate the benefits of investing in a founder from the same ethnic group. Our paper adds new evidence on the role of ethnic minorities in entrepreneurship, and contributes to prior studies of how VC firms overcome informational frictions.
38 pages, April 23, 2013
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