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Continued from previous page
VC Investors’ Leap of Faith
Guillén is also looking at the largely unstudied area of venture capital outside of the U.S.
“This issue has become of great interest recently because
there are just not enough good entrepreneurs to give money to
in the U.S., but there are a lot of opportunities in other parts of
the world,” he says. “The problem for venture capital firms is
that they have to keep a close eye on the ventures they are funding,
which is hard to do when the venture is a six-hour or more
plane ride away.”
Guillén says, “It is a leap of faith to give money to an idea
and most of these investments end up with nothing. However,
out of every 10 or 15 investments, there may be an IPO or trade
sale and they make a lot of money — which compensates for
all of the other losses. And when you go abroad, the risks multiply
and are so much more difficult to monitor.”
Guillén says that when firms invest outside of the U.S.,
they tend to put their money into ventures in Canada, Britain, France, Japan, and to a lesser extent into China, India and
Latin America. “It is amazing that they are supposed to know
how to manage risk, but are incredibly risk averse at a country
level,” he says.
Another finding is that well-known and successful U.S. venture
capital firms also tend to do well outside of the U.S. “It
shouldn’t be surprising that good firms here are good firms elsewhere,
but venture capital firms don’t usually invest alone,” he
says. “They invest with other firms, governments, banks, or
forms of syndicates. You have to persuade the coinvesters that you
are reliable, which is easier for prestigious firms. So it is a kind
of rich-get-richer dynamic and rarely will you see small venture
capital firms invest abroad.”
Guillén has also found that U.S. venture capital firms tend
to rely quite heavily on “ethnic links.” He explains that “if a company has a lot of Indians working for it or it is located in a
part of the country with a lot of Indian migration, then it tends
to invest more in India.
“This explains why places like Israel, Ireland, India, China,
Taiwan, and South Korea, for example, receive more investments
from the U.S. than others.”
In recent years, Wharton students have become so interested
in this phenomenon that a course called Private Equity
in Emerging Markets, taught by lecturer Stephen Sammut,
has been added. Guillén’s own Global Strategic Management
course for MBAs and Multinational Management course for
undergraduate students offer similar insight.
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