Foreign VCs and venture success: Evidence from China

This paper analyzes the role of foreign VCs in driving venture success in emerging markets. We analyze a comprehensive data set of 4753 portfolio companies from China. We test whether the presence of a foreign VC increases the likelihood that a portfolio company is successfully exited. We find that the presence of a foreign VC does not per se significantly increase the likelihood of a successful exit. However, the likelihood of a successful exit increases if the foreign VC collaborates with a joint venture (JV) partner. Further, the impact of foreign VC backing depends on the nature of the VC, with foreign VCs tending to perform better when investing in late-stage companies and when they are diversified across industries. If a foreign VC successfully exits an investment, then, compared with a domestic-VC, it prefers to exit via a M&A or secondary-buyout than via an IPO, reflecting the significant lock-up periods associated with VC-backed IPOs in China, the difficulty of achieving a foreign listing, and the difficulty listing a start-up on Chinese markets.

► We study the impact of foreign VCs on exit outcomes using a comprehensive database of 4753 VC backed companies in China. ► Foreign VCs do not per se increase the likelihood of venture success. ► In foreign-backed companies, a joint venture partner makes success more likely. ► The impact of foreign VCs on VC-success varies with firm and fund characteristics. ► Foreign VCs are less likely to exit via IPO but IPO-exits have increased in popularity over time.