The geography of venture capital and entrepreneurial ventures' demand for external equity

In this paper, we study how the geography of venture capital (VC) and the location of entrepreneurial ventures affect the propensity of the latter to seek external equity financing. We analyse a sample of 533 European high-tech entrepreneurial ventures and examine their external equity-seeking behaviour in the 1984–2009 period. We find that ventures are more likely to seek external equity when the local availability of VC is higher, whereas the level of competition of the local VC market plays a negligible role. The stimulating effect of the availability of VC on the demand for external equity rapidly decreases with distance and vanishes at approximately 250 km. It also vanishes when national borders are crossed, except for countries at close cultural and institutional distance. Moreover, the distance decay of the stimulating effect of the availability of VC varies with the characteristics of prospective VC investors, namely, their private or public ownership and governance, and their reputation. These results have important implications for the policy that European countries and the European Commission should implement to foster the demand for VC by entrepreneurial ventures, thereby improving the functioning of the VC market in Europe.