Ethnic matching in the U.S. venture capital market

• Published in: Journal of business venturing Vol. 30; no. 2; pp. 338 - 354
• Main Authors: Bengtsson, Ola, Hsu, David H.
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.03.2015; Elsevier Sequoia S.A
• Subjects: Boards of directors; Corporate governance; Economics; Economics and Business; Ekonomi och näringsliv; Entrepreneurs; Ethnic matching; Ethnicity; Nationalekonomi; Samhällsvetenskap; Social Sciences; Studies; Venture capital; Venture capital companies; United States > US; G24; L26; Ethnic matching; M13; Venture capital
• ISSN: 0883-9026; 1873-2003
• DOI: 10.1016/j.jbusvent.2014.09.001

We document the role of entrepreneurial founder and venture capital (VC) partner co-ethnicity in shaping investment relationships. Co-ethnicity increases the likelihood that a VC firm invests in a company. Conditional on investment, co-ethnicity strengthens the degree of involvement by raising the likelihood of VC board of director involvement and increasing the size and scope of investment. These results are consistent with trust and social-network based mechanisms. Shared ethnicity in our sample is associated with worse investment outcomes as measured by investment liquidity, however, which our results suggest might stem from looser screening and/or corporate governance. •We study founder and venture capitalist (VC) co-ethnicity in shaping whether, when, and how investments take place.•A shared ethnicity increases the probability of an investment match.•Conditional on an investment, co-ethnicity is associated with earlier and deeper VC involvement.•However, matches based on a shared ethnicity are associated with less successful company outcomes.