Geography matters in investing but should it? A new study found
that investors like to invest locally but that it doesn’t necessarily translate
to better returns. The study analyzed publicly traded stock patterns but may have lessons
for private equity. At Fundability, we can see that a startup’s locale is a huge factor for angel
investors. Conventional wisdom that angels invest within 50 miles of where
they live because they like face time with entrepreneurs and the chance to
influence strategy.
It’s not a news flash that Silicon Valley is the epicenter of
venture capital. The region invests nearly 4 out of every 10 VC dollars with most ending up in the hands of Northern California entrepreneurs. In the
first quarter, Dow Jones VentureSource reported that VC investments in the Bay Area rose 10 percent ($2.56 billion in
213 deals) while VC deals across the US were falling for the first time in 3
years.
Ok, what about the returns for local deals? The study is
called “Long Georgia, Short Colorado?
The Geography of Return Predictability”
It was conducted by George
M. Korniotis of the Federal Reserve and Alok Kumar of the University of Texas, Austin who discovered a local bias after studying the stock holdings of
75,000 investors over 5 years. They found that investors tended to favor and
invest in companies from their home state. With too many choices, investors
choose the familiar. Korniotis and Kumar also demonstrated that investors would
be wise to guard against the local bias which is vulnerable to local economic ups
and downs.
My unscientific
opinion is that the geography will matter less to investors in a world that continues
to gets flatter every day. So, what’s the takeaway for entrepreneurs, angels and VCs? Beware of
your local bias…unless you live in Silicon Valley.