Small-World Networks, Dynamics and Proximity in Investment Decisions

Using deal-level micro data from the Dealroom database, we construct a dynamic co-investment syndication network to examine the influence of cultural proximity and geospatial proximity between investors and start-ups, as well as the network position of global VC firms on investment decisions in European-based start-ups. By applying a linear probability regression model with high-dimensional fixed effects over the period 2015-2022, we confirm that both cultural and spatial proximity significantly facilitate VC investment. Moreover, our analysis reveals that a prominent network position — characterized by how well-connected (degree centrality) and how influential (Katz centrality) within the co-investment network— substantially enhances VC investments on account of the facilitated sharing of information, contacts, and resources among investors. Furthermore, our findings reveal that small-world networks, characterized by high clustering coefficients, facilitate investments in distant start-ups, helping to overcome spatial constraints—an aspect largely overlooked in the literature. Small-world syndication networks foster trust among members, complementing each other through differentiation and specialization in industrial knowledge and local markets, potentially altering risk-averse behaviour and enabling investments that transcend geographical boundaries.