Cross-border investment – considering the big picture
The VC industry has recently experienced a spike in international growth. In our ever-so-expanding globalized world, is it a good idea to get in on the trend, or just simply stick to domestic investments? This is a question many VC investors have been asking themselves over the past years. However, the answer, like most answers, is not a simple yes or no. In this article, we at DEPO Ventures aim to consider the main aspects of cross-border investments and perhaps shed some light on the industry itself, mainly utilizing information from academic sources.
First, let us look at the undoubted positives of cross-border investments. It is a fact that cross-border investments, in general, provide faster exits for investors (Alvarez-Garrido & Guler, 2018). An equally important aspect is that VC funds investing in foreign projects simply have more to choose from. This helps them diversify their investment portfolio, as well as differentiate themselves from purely domestic competitors (Bradley et al., 2018). While investors who focus on the domestic market are limited, foreign investors can create an image of understanding the ‘big picture’, therefore differentiate themselves in the market.
The big picture
By our estimation, some investors often tend to marginalize this big picture. By diversifying a portfolio and foreign investment, the investment companies theoretically work as direct diplomats between the respective ecosystems of the two countries. Investing in a less rich environment, or an environment with an underdeveloped VC market creates the potential for further growth of this region. This factor is feasible especially within systems like the EU, because of several normalizing programs, prerequisites for economic stability regulations, and safer overall transactions due to a single currency policy. More importantly, less socially networked regions will benefit from foreign investment because they can acquire connections. This works both ways, considering that startups are already most likely to consist of well-educated people, who can adapt well to the new ecosystem, creating a beneficial workforce for the country of origin of the VC. If the relationship is truly exceptional, it may produce relocation of this workforce, enriching the domestic market, and strengthening ties within the business industry of both countries on the macro level.
It is also important to understand the relationship between a VC investor and the targeted investment object. If an investment would be happening on a cross-border basis, startups themselves tend to prefer conditions like “high-status VC investors, network connections, and resources” (Alvarez-Garrido & Guler, 2018). From the standpoint of international relations, research seems to prove that the relationship between the home countries of both the investor and the investee is a considerable factor in the cooperation of the two groups. The investment policy of two countries on good terms is logically better than that of two countries without much international involvement. In the past, distance was seen as an issue for most investors as well as startups. It becomes difficult to communicate with different companies if they are geographically far away, and there are sometimes even cultural factors standing in the way of mutual understanding. Meeting people face to face has been the preferred method while searching for a viable investment deal. However, we could argue that recently this trend has been dying out, and the final blow might be the very much impactful experience of the COVID-19 pandemic, which counterintuitively opens doors for many international projects, education possibilities, and yes, even investments. People are suddenly able to self-learn, study at universities thousands of kilometers away as well as gain insight into previously unknown foreign markets. Many scholars (such as Alon, 2020) have theorized about the COVID-19 pandemic slowing down investment processes, however, what they do not account for is the way how this crisis made us restructure our way of looking at social interaction, which includes business relations. This combined with extensive globalization of the international market creates great potential for cross-border investment because now everyone understands that international communication, as well as business, is not as border restrictive as we thought.
Policy making as a gateway to a healthy ecosystem
If we wish to create the best investment ecosystem in our country, investors need to be directly involved with policymakers, in order to accelerate the best startups and create global know-how. There exists a popular opinion, that smaller countries cannot benefit from having a large VC market like larger countries with higher GDP. The counterpoint to this argument is the case of the state of Israel. Because of direct cooperation between the government and Israeli investors, information-technology revenues rose from 1.6 billion to 12.5 billion dollars in only 9 years (Bradley et al., 2018). The fact is that a small, limited market such as Israel made it possible for better and more transparent international cooperation, even without modern tools for easier communication as this happened in the 1990s. An interconnected, well-functioning network is therefore theoretically much more important for a healthy ecosystem rather than a big booming economy.
Lastly, we need to talk about the future of international investment. At some point, expertise is going to be passed from successful entrepreneurs who become angels to the next generation of investors (Bradley et al., 2018). This is the point where the focus between the ‘old’ and ‘new’ generations might differ. For millennials today, distance as well as non-local communication is no longer an issue. The next generation of investors is by our estimation going to be investing in foreign markets exponentially more than the current one. Therefore, nothing stands in the way of investors today from reaching international markets before they will be overflowing with investment deals. And like everyone knows, getting into any lucrative market as one of the first ones to do so is the best possible thing for any investor.
Alon, I. (2020). Covid-19 and International Business: A viewpoint. FIIB Business Review, 9(2), 75–77. https://doi.org/10.1177/2319714520923579
Alvarez-Garrido, E., & Guler, I. (2018). Status in a strange land? context-dependent value of status in cross-border venture capital. Strategic Management Journal, 39(7), 1887–1911. https://doi.org/10.1002/smj.2777
Bradley, Duruflé, Hellmann, & Wilson. (2019). Cross-border Venture Capital Investments: What is the role of public policy? Journal of Risk and Financial Management, 12(3), 112. https://doi.org/10.3390/jrfm12030112
Schäffler, J., Hecht, V., & Moritz, M. (2016). Regional determinants of German FDI in the Czech Republic: New evidence on the role of Border Regions. Regional Studies, 51(9), 1399–1411. https://doi.org/10.1080/00343404.2016.1185516