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]