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Ethnic Matching in the U.S. Venture Capital Market

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.

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Paper provided by Knut Wicksell Centre for Financial Studies, Lund University in its series Knut Wicksell Working Paper Series with number 2013/8.

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Length: 38 pages
Date of creation: 23 Apr 2013
Date of revision:
Handle: RePEc:hhs:luwick:2013_008
Contact details of provider: Postal: Knut Wicksell Centre for Financial Studies, Lund University School of Economics and Management, P.O. Box 7080, S-220 07 Lund, Sweden
Phone: +46 46-222 32 61
Fax: +46 46-222 34 06
Web page: http://www.lusem.lu.se/kwc

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