Shai Bernstein is an associate professor of finance at Stanford Graduate School of Business, specializing in corporate finance and entrepreneurial finance.

How to join the network

On the back of the news that Wing Venture Capital has closed its second fund, to the tune of $250 million, venture capital is once again under the spotlight.

At the end of November, the U.K. government also focused heavily on the industry as part of its Autumn Statement, with plans to invest £2 billion into science and tech innovation, as well as a plan to invest £400 million via the British Business Bank into VC funds for growth capital. Interestingly, the U.K.’s Autumn Statement was also laced with new funds and investment strategies around infrastructure.

So why is it important to invest via VCs, and do they add value further to the money they invest into a growth business? Furthermore, what role do physical transport links play in terms of business success and innovation in this, the digital age?

Seemingly, in this very modern and digital world to which most developed societies are now accustomed, there are all manner of different mediums by which to connect, communicate, share knowledge and even send physical objects, in the guise of 3D printers, without need for physical transfer or transport. So surely enhanced physical transport links will have little impact, right?

Wrong.

Research we undertook over the last year was trying to empirically prove or disprove the idea that venture capital investors actually added value further to the capital they invested. We undertook the study predominantly in the U.S., with U.S. businesses and U.S. investors, looking at how direct flights increased face to face interaction between investors and portfolio, and how that in turn impacted those businesses’ probability of success and innovation. The results were really quite interesting.

Our research showed that better infrastructure links between investors and portfolio, in the shape of a new direct airline route in this instance, led to an increase in face to face interactions between investors and portfolio businesses due to the comparative time and cost saved. The results for those portfolio with increased face to face time highlighted that the number of patents filed rose by three percent, and the citations per patent rose by almost 6 percent, indicating an increased quantity and quality of innovation.

Furthermore, the probability that those portfolio would IPO or achieve a successful exit also increased. By controlling the impact of “local shocks,” we confirmed that pre-existing trends were not driving these results and that VCs really are adding value to their investments.

Therefore, we were able to empirically prove that venture capital investors do add value to their investments further to the cash injection they are able to provide. How each VC does this will be specific to their skill sets and relationships, but most will be able to offer sound advice and support due to their own business acumen, and open doors to which startup founders may not have access.

Furthermore, the research also highlighted the importance of face to face interactions for businesses, even in this digital age when video calls and emails are seen to be more efficient ways of doing business. In the case of our U.S.-centric study, the introduction of direct flights were effective in increasing these interactions. In the U.K., and other, less expansive, nation states, direct flights are less feasible in terms of intra-city travel, but enhanced transport links such as high-speed trains could have a big impact on increasing these interactions, and, in turn, the success and innovative nature of their growth businesses.

In light of Brexit, it is interesting to see the U.K. investing heavily in infrastructure, whilst other European hubs, which already have access to things such as high-speed rail, namely Germany and France, jostle to take the U.K.’s crown as the European king of startups and venture capital. With other European nations, such as Sweden and Portugal, also working hard to support their blooming tech and investment ecosystems, it is no secret how important innovation, high-growth businesses and their VCs are to the economies of nation-states. These businesses and technologies are the future, but a good old-fashioned face to face should not be overlooked, especially with VC investors.

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