Every semester I have Stuart McWhorter, Co-Founder and Managing Partner of Nashville-based venture capital firm Clayton Associates, come to class to talk about the venture capital process. One of the points he always drives home to my students is that most venture capital firms tend to prefer investing in industries that they have experience in from previous deals. He also says that they prefer to work with deals that are more local.
It seems that a study by Junfu Zhang available at the Kauffman Foundation web site supports this, particularly when it comes to Silicon Valley.
This paper shows that Silicon Valley received a large proportion of the nation's total venture capital investment during 1992-2001 and that start-ups in Silicon Valley appear to have easier access to venture capital: They receive the first round of venture capital at a younger age, raise more money in each round of financing, and complete more rounds of financing. This easier access to capital significantly affects start-up performance in Silicon Valley. While the easier access may simply be a result of the higher supply of monetary capital in Silicon Valley, it is also consistent with the view that venture capital in Silicon Valley comes with more human and social capital.
This last point is also driven home by most venture capitalists that I know. Most will tell you that they often do multiple deals over time with the same entrepreneurs. The odds of you getting funded go way up if you have been funded by them in the past.
As the old saying goes, "If given a choice between an "A" deal and a "C" team, or an "A" team with a "C" deal, venture capitalists will take the "A" team every time."
And the chances are even higher if they have worked with that "A" team before and if that team is right around the corner.
