Syndication networks and the spatial distribution of venture capital investments

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Citation: Olav Sorenson, Toby E. Stuart (2001) Syndication networks and the spatial distribution of venture capital investments. American Journal of Sociology (RSS)
DOI (original publisher): 10.1086/321301
Semantic Scholar (metadata): 10.1086/321301
Sci-Hub (fulltext): 10.1086/321301
Internet Archive Scholar (search for fulltext): Syndication networks and the spatial distribution of venture capital investments
Tagged: Sociology (RSS) Social Networks (RSS), Entrepreneurship (RSS), Business (RSS), Venture Capital (RSS)


The article is in part framed by the idea that in knowledge-based industries, one might expect organizations to be widely diffused. Economics tends to explain concentration in terms of "knowledge spillovers." Sorenson and Stuart use data from venture capitalists to explore the geographic concentration of venture capital networks both in geographic space and in industry space (i.e., in distance across different types of businesses and industries). They find a high degree of concentration. They argue that it is the spatial clustering of social and professional relations that offer an alternative, sociological, explanation.

Either geographic or industry concentration -- a form of homophily -- can be seen as operating either through homophilic preferences or through opportunities within a group. Sorenson and Stuart argue that VCs will tend to concentrate their funding within a specific geographic and industry space because such concentration helps them (1) become aware of good funding opportunities and (2) allows VCs to better tell the quality of a firm and to monitor it going forward.

The authors exploit the fact that a large amount of VC funding comes not from a single VC but from a syndicate or network of different VCs. They use this data all on VC investments from 1986 to 1998 as network data to explore the role of distance between the VC and the funded venture.

In a strong network-based finding, the VC firms that do overcome geographic and industry boundaries often do so by connecting repeatedly with firms that are within a local area and that, through repeated work, they develop trust in. In other word, VCs will fund a firm that is farther away if they are in a syndicate with a firm they trust (through previous interaction) that is closer.

Theirs is an important economic sociology and organizational sociology finding in that they show how institutions and social structure shapes exchange patterns among the VC market and shows that information about potential investments tend to circulate within tight geographic and industry spaces. They argue that, "whenever personal and professional networks play a central role in economic activity, we will likely observe spatial patterns in the unfolding of that activity."

Their basic findings are the same when their DV is geographic and industry distance.

Theoretical and Practical Relevance

The paper has been cited more than 500 times in the last 9 years. It is cited in the literature on spillovers, entrepreneurship, and the sociological literature on social networks.