Finance & Investing

Shai Bernstein: Does Face Time with Investors Make a Startup More Successful?

Having investors you can easily interact with can help a business grow.

August 11, 2015

| by Eilene Zimmerman


illustration of airplane with exit stairs

About 40 percent of investors are located more than 600 miles from their portfolio companies. | istock

Want your startup to have an IPO? Start spending more time with your VCs.

New research by Stanford Graduate School of Business professor Shai Bernstein shows that the more time venture capital investors spend with their portfolio companies, the more likely those startups are to produce innovation and have an exit, either an IPO or an acquisition. “This is compelling evidence that the active involvement of venture capitalists is very important for their portfolio companies,” says Bernstein.

The mystique surrounding venture capitalists, especially those at well-known firms like Kleiner Perkins or Andreessen Horowitz, is that their involvement with a startup is a golden ticket, making success much more likely. Yet even though about 40% of all companies that have an IPO in the United States are backed by venture capitalists, it has been almost impossible to know if that is the result of an investor’s involvement with a company or simply that VC’s know-how to pick winners. “We had no way to know if their involvement with a startup was what made it a winner,” said Bernstein.

That’s because it is difficult to measure. But Bernstein and his colleagues Xavier Giroud at the MIT Sloan School of Management and Richard Townsend at Dartmouth’s Tuck School of Business found a way to do it.

They focused on transportation; specifically, how easy or difficult it was for VCs to visit one of their portfolio companies. About 40% of investors are located more than 600 miles from their portfolio companies. Bernstein says he and his colleagues turned their attention to the introduction of direct flights between cities where VCs were located and startups were based. “If you look at the flow of venture capital in the U.S., you find that it’s actually strongly affected by the availability of direct flights,” says Bernstein. His guess was that direct flights increase the amount of time VCs spend with portfolio companies, and 80% of VCs surveyed by Bernstein and his colleagues said they did spend more time at portfolio companies that were reachable by a direct flight.


The researchers also compared pairs of companies located in the same industry and region, with one backed by a VC in a city connected to it by a direct flight and the other backed by a VC in a city that did not have a direct flight connection. They looked at 22,986 venture-backed companies that were active between 1977 and 2006. Collectively, the companies received funding from 3,158 VC firms.

To test whether or not that extra attention and interaction affects a company’s success, they looked at both the quality of the innovation produced by a startup and the likelihood of its IPO or acquisition.

Innovation was measured by the number of patent applications submitted by each startup (and the number of patents ultimately granted). But even more important was the number of citations — where patent applications submitted by other companies cited the startup’s technology. Citations show that an innovation or invention already exists and helps establish the scope of a new patent’s claim. “There aren’t that many patents that open up a new field of research, so citations mean that a company’s technology or invention is important in a way that generates a lot of new patents,” says Bernstein. “And that shows it’s innovative.” In fact, an extra citation per patent boosts a company’s market value by 3%.


If you look at the flow of venture capital in the U.S., you find that it’s actually strongly affected by the availability of direct flights.
Shai Bernstein

The researchers also found that despite a variety of state and local initiatives to help create startup communities and generate VC investment, infrastructure — specifically transportation access to the region — was crucial for a city to attract capital.

Bernstein says better airline connections between two cities actually foster more venture capital flow between them. He found that introducing a direct flight between two cities leads to a 4.6% increase in venture capital investments in those cities, and that VC firms tend to invest in places that are easier to access. That in itself, says Bernstein, shows investing isn’t just about the money. “It’s also about the time investment,” he says.

With that in mind, Bernstein’s recommendation for regions trying to foster entrepreneurial activity — and for startups considering where to locate — is to pay attention to access. Cities might consider subsidizing direct flights to Silicon Valley, says Bernstein, and company founders should think about where investors are located when they are trying to raise money. Bernstein says the research proved that face time — not just Skype meetings and conference calls — has a significant impact on a startup’s success. “Having investors you can easily interact with can really affect your ability to grow a business successfully,” he says.

Shai Bernstein is an assistant professor of finance at Stanford Graduate School of Business. The paper “The Impact of Venture Capital Monitoring” will be published in a forthcoming issue of the Journal of Finance.

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