By Authors:
Wei Xia – University of Washington
H. Kevin Steensma – University of Washington
Xiaoou Bai – Georgia State University
Interviewers:
Inara S. Tareque – Columbia Business School
Shiying Wang – Cornell University
Article link: https://doi.org/10.1177/00018392221145965
1. How did you develop the idea for this incredibly informative paper and did you originally envision studying the Chinese venture capital market?
The idea first emerged from our interest in nationality-based homophily. We chose the Chinese VC market due to its unique characteristics, which are ideal for exploring our research questions. Our extensive work experience in the investment market informed this decision. The growth of the Chinese VC industry has been astonishing, and most of its foreign investments came from U.S. investors. In addition to other advantages of the VC context, the Chinese setting provided a high level of validity for investigating the cultural distinctions between the two nationalities.
We addressed concerns regarding the Chinese research context by: (1) carefully assessing how this context might influence our empirical results, (2) considering how our design and empirical specifications mitigate alternative explanations, (3) performing supplementary analyses to support our proposed mechanisms, and (4) conducting field interviews. These multi-method approaches were crucial in our progress through the review process.
A key pivot in the revise and resubmit process was to substantiate multiple assumptions in our paper. For example, our theory assumes that Chinese firms might be ostracized if they deviate from collaborating with their compatriots. Empirically, we discovered that a Chinese venture capital firm is often shunned by other Chinese firms if it frequently collaborates with U.S. venture capital firms. Our interviews also supported this assumption. The entirety of our analyses, encompassing theoretical development, empirical research, and interviews, thus enhanced the validity of our arguments.
2. Since indebtedness and familiarity are key mechanisms that explain the differential impact of collaborative first moves between U.S. and Chinese venture capital firms, but these mechanisms could not be directly measured using the data available, was this something that concerned you? Relatedly, were there any major hiccups in the life cycle of the paper?
This is another example of improving the validity of our arguments based on the entirety of our analyses, which include theoretical development, empirical research, and interviews. Theoretically, we proposed that both mechanisms, familiarity and indebtedness, play distinct roles in reciprocity for U.S. and Chinese firms, respectively. While these mechanisms are unobservable, we found a way to empirically isolate them through their shared syndication experiences. Serving together as syndicate partners in an investment led by a third venture capital firm provides an opportunity for two firms to become familiar. However, such a relationship does not necessarily create indebtedness to reciprocate. Our interviewees also echoed these notions regarding their considerations of reciprocity.
The life cycle of this paper was quite eventful. The first version was submitted in October 2020, and we received final acceptance in December 2022. The extensive effort behind the scenes, however, is noteworthy. Our working folder contains around 200 versions of the paper, and we wrote over 10,000 lines of code to analyze empirical data.
3. We could see both the qualitative interviews with the managing directors and general partners from Chinese venture capital firms and the authors’ extensive knowledge around Chinese context offered unique insights in this paper. At what stage of the publication process did you plan to conduct interviews and why?
Comments from the editor and reviewers prompted us to conduct post-hoc interviews for the first round of R&R. Due to the pandemic, conducting interviews was challenging, but our industry connections enabled us to complete them efficiently. All interviews lasted up to two hours. Each interviewee shared their insights indicating their care for the industry and desire to have their voices heard in academia. Their level of engagement was truly impressive.
Integrating qualitative evidence with quantitative analysis based on archival data significantly enhances the validity of our arguments. The interviewees provided everyday examples that highlighted the differences between VC partners in Chinese and U.S. firms. These insider perspectives were valuable for developing confidence in our underlying assumptions and the validity of our results.
4. The paper argues that homophilic preference (identity-based trust) will be more resilient to collaborative first moves (experienced trust) under collectivist societal value. However, some might argue that the effect of collaborative first moves on diminishing homophilic preference will be attenuated when the Chinese firm subsequently assemble its investment syndicates because they are investing in Chinese new ventures, and the baseline level of knowledge and trust in Chinese new ventures are different across two venture capital groups. Would you expect different results if identity-based trust and experienced trust between venture capital and new ventures are considered?
This is an important question. Because the sample used for analysis is the initial-round syndicates, there is no experienced trust between the focal new ventures and those prospective partners. In addition, we deployed conditional fixed effects delineated by choice set. Because each choice set is nested within an investment syndicate that is led by a sole VC firm, all unobserved characteristics associated with the syndicate (e.g., the identity-based trust of the venture) are controlled for.
The focal lead VC firm and the prospective partners may have indirect relationships due to their prior investments in other ventures. We also accounted for heterogeneity related to such triadic relationships. Some controls in place include:
- Indirect Ties: This measures the number of common venture capital firms that previously syndicated with both the focal lead firm and the prospective partner firm.
- Shared Syndication Experience: A binary variable indicating whether a syndicate lead firm and a prospective partner firm have served together in an investment syndicate initiated by a third venture capital firm.
- Prospective Partner Receptiveness to Lead Firm Nationality: This metric measures the number of venture capital firms of the same nationality as the focal lead firm that the prospective partner chose to interact with in the five years leading up to the focal syndicate.
- Additional Embeddedness Factors: Other considerations include the total number of deals in which the potential partner participated and their status, as measured by Bonacich centrality.
This question also suggests that the US VC firms in our sample are investing in a national environment other than their own, they face distinct liabilities of foreignness. In contrast, Chinese VC firms are on their home turf. There might be a general bias to choose Chinese prospective partners in this context.
Our design and empirical specifications mitigate this concern. In essence, our design allows us to compare two difference-in-difference effects, that is, the comparison between US and Chinese lead firms in terms of the difference in their likelihood of including prospective syndicate firms of similar nationality when these syndicate firms have not made collaborative first moves to when prospective syndicate firms have made collaborative first moves. In effect, the design differences out general biases of prospective partners based on their nationality when testing our primary hypothesis (H4).
5. From your experience working on this paper, what are some challenges and advantages of doing research in emerging markets context?
Emerging markets often present significant growth and development potential, offering rich observations within a relatively short historical span. Additionally, the social and cultural contexts in these markets are diverse, allowing for comprehensive cross-cultural analyses. Research in these markets can significantly impact the real world, contributing to policy-making and economic development. However, conducting research in emerging market contexts requires a stringent design, as these markets often experience substantial political and economic volatility, impacting research outcomes and complicating longitudinal studies. A deep understanding of business practices requires profound cultural insights.
6. How could your findings about homophilic preferences and reciprocity in the formation of syndicates influence the strategy of venture capital firms in China and the U.S.?
There are some implications for the VC industry. In individualistic societies where homophilic preferences can be mitigated by collaborative initiatives from outsiders, firms with expansive, diverse, and evolving ego networks may develop sustainable competitive advantages. In collectivist societies, there is a benefit from the broad-based acceptance of national policies that boost economic development. However, these same societal values may lead to a reluctance to embrace diversity in collaborative networks and a decreased receptivity to global capital flows, which are essential for ongoing economic development.
7. What other projects are you working on that are connected to this work?
One upcoming project is to investigate different types of nationality-based inequality. We plan to examine how accumulating reputation in the host country might increase the inequality experienced by foreign VCs. We will also investigate the individual-level match between VC partners and entrepreneurs, exploring how such matches influence various venture outcomes. Additionally, we aim to explore tie dissolution among these individuals.
Interviewer bios:
Inara S. Tareque is a doctoral student in Management at Columbia Business School conducting research at the intersection of inclusive entrepreneurship, social capital, and entrepreneurial strategy.
Shiying Wang is a doctoral student in Management and Organizations at Cornell University, working on entrepreneurship, sustainability, and social networks.