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Ethnic Matching in the U.S. Venture Capital Market

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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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  • Bengtsson, Ola & Hsu, David H., 2013. "Ethnic Matching in the U.S. Venture Capital Market," Knut Wicksell Working Paper Series 2013/8, Lund University, Knut Wicksell Centre for Financial Studies.
  • Handle: RePEc:hhs:luwick:2013_008
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    2. Sari Pekkala Kerr & William R. Kerr, 2016. "Immigrant Entrepreneurship," NBER Chapters,in: Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, pages 187-249 National Bureau of Economic Research, Inc.
    3. Fuchs, Florian & Fuess, Roland & Jenkinson, Tim & Morkoetter, Stefan, 2017. "Winning a Deal in Private Equity: Do Educational Networks Matter?," Working Papers on Finance 17155, University of St. Gallen, School of Finance.
    4. repec:bla:ecopol:v:29:y:2017:i:2:p:91-117 is not listed on IDEAS
    5. repec:spr:jbecon:v:88:y:2018:i:3:d:10.1007_s11573-017-0874-4 is not listed on IDEAS
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    9. repec:ers:journl:v:xx:y:2017:i:2b:p:111-122 is not listed on IDEAS
    10. Poonam Khanna & Lemaro Thompson & Michael Mcdonald, 2015. "Research On Venture Capital Firms’ ‘Investment Behavior A Review’," Working Papers 0197mgt, College of Business, University of Texas at San Antonio.
    11. repec:eee:tefoso:v:127:y:2018:i:c:p:112-126 is not listed on IDEAS
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    More about this item

    Keywords

    Entrepreneurship; Venture Capital; Matching; Ethnicity;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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