The Venture Capital Cargo Cult

Which comes first, entrepreneurship or venture capital? Regional development officers often act as if the answer is obvious: Venture capital. They prattle on about how their region needs more venture capital, and that will let loose the dogs of local entrepreneurship war.

To most venture capital investors that has always seemed like cargo cult behavior. We’ll go wherever there are good deals, so if there is no money in your area (within reason), it’s usually because there is either little worth funding, or whatever there is that is fundable can be done from a distance.

There is a useful Cato paper now out on this subject, and it attempts to answer the causality question directly. So, which way does the water flow, from entrepreneurship to venture capital, or from venture capital to entrepreneurship? You guessed it: Straight from entrepreneurship to venture capital.

Of course, it’s not that venture capital is unimportant, as the paper points out:

It is important to note that our results do not contradict the idea that venture capital is important in the entrepreneurial process. In fact, our results are most consistent with the literature on entrepreneurial survival, which suggests that once an entrepreneurial venture is started, venture funding will significantly increase the chance of survival. What our results do say, however, is that focusing development efforts on attracting more venture funding will not be an effective method of encouraging the higher levels of entrepreneurial activity necessary for economic growth. Rather, attracting and promoting underlying entrepreneurial activity must be the focus of development efforts and venture funding will automatically, and naturally, flow into the area to support this activity. [Emphasis mine]

Related posts:

  1. Google Says Kleiner is No Longer in the Venture Capital Business
  2. John Kerry’s Misadventures in Venture Capital
  3. Newbies Flood Venture Capital (Again)
  4. Pining for the Glory Days of Venture Capital
  5. The Institutionalization of Venture Capital

Comments

  1. Brent Holliday says:

    If the logic that entrepreneurship follows money actually was correct in the real world, then half of the Silicon Valley would presently be on its way to Qatar, Dubai and Riyadh. Many regional technology ouposts have spent lots of government money and time courting private equity and venture capitalists, yet fail to actually hear them when they say, “Where are the good deals?”
    The Silicon Valley “bicycle rule” about being close to your investment is a conveniency. The reality is that early stage investors still make money from a distance as long as at least one investor is close to the deal. If it’s a good opportunity, money will find it.

  2. Brent Buckner says:

    Thanks for the reference! Interesting that it was published in _Cato Journal_ – I hope it gets wider play. Being as the data is from U.S. states, I suppose that everywhere else there will be squawks about generalizability.