Growing up but staying home: Patient equity investors and firm scale-up

Abstract

Sustained and inclusive economic development is the product of mature firms, commonly referred to as scale-ups. While some studies suggest equity investors enable firm growth, others argue equity-backed startups are more likely to be acquired or relocate to more developed regions. To address this ambiguity, we examine the Israeli high-tech sector, where a growing number of startups are scaling up locally. Building on existing literature and exploratory interviews with industry members, we focus on how investors' business strategies and founders' characteristics shape startups' ability to scale up locally. We argue that local scale-up is most likely in cases where equity funds act as patient capital and invest in startups founded by experienced entrepreneurs or founders who are highly embedded within the local eco-system. Exponential competing risk models of the growth outcomes of 5689 Israeli high-tech firms established between 2005 and 2020 largely confirm our claims. We discuss how our results inform understanding of equity investors' impact on scale-up and public policies that can support more inclusive innovation ecosystems. • Inclusive economic development is often the product of mature and profitable firms, commonly referred to as scale-ups. • Funding from patient equity investors (PEIs) increases the likelihood of local scale-up. • Funding from PEIs also increases the likelihood that startups will relocate to other ecosystems. • Funding from PEIs is more likely to result in local scale-up if startup founders are highly embedded in their ecosystem. • Funding from PEIs is more likely to result in local scale-up if startup founders have high entrepreneurial experience.