Musings on Entrepreneurship and Innovation
Saturday, June 18, 2005Venture Capital Networks
Toby Stuart, a professor at Columbia University, has been doing interesting work in regard to the sociology and geography of venture capital for years. In particular, his work helps explain why venture capital activity tends to cluster, even when the raw material of VCs' work is nominally transportable:
This research, which has implications beyond the VC industry, represents the beginning of a sociological explanation of the spatial organization of economic activity. The clustering of social and professional relations helps to explain why economic activity often remains concentrated even in industries in which the primary input — knowledge — can be inexpensively transported across large distances. These findings suggest that in industries that rely on private information and a high degree of trust, institutions supported by broad participation must precede the expansion of the spatial range of economic exchange. In the VC industry, the syndicated coinvestment network provides this infrastructure.
Economic developers have noticed the correlation between venture capital and economic success. Hoping to emulate success, resources have been thrown at replicating the readily observable attributes of venture capital without an appreciation for the required co-investment in an accumulation of trust built through reciprocity across the larger VC network. In contrast, Trevor Loy at Flywheel Ventures understands that effective venture capital cannot thrive in isolation. He also understands that the accumulation of enabling social capital takes longer than raising a pool of money.
