financing clusters of innovation: the geography of venture capital investment, us & uk terry l....
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FINANCING CLUSTERS OF INNOVATION:the geography of venture capital investment, US & UK
Terry L. Babcock-LumishUniversity of OxfordIslay Consulting LLC
New Finance of America’s Cities Research Symposium December 10-11, 2007Cambridge, Massachusetts
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Introduction
• Professional background– academic and applied
• Research interests and efforts– seek to integrate local with global
contribution to emerging synthesis of finance & NEG – Clark & Freeman 2007
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Overview of presentation
• Global and local– increasing global integration– continuing importance of regional dynamics
• importance of fundamental drivers in unceasing search for returns
• Patterns of Anglo-American VC investment– GIS mapping
• Investing in the familiar– risk mitigation & relational economic geography
• Empirical redux• Lessons learned: 7 Cs
– capital, capability, creativity, culture, cluster, connection, collaboration
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Why venture capital?
• Investors with varied commitments, incentives, expertise– private v. public– tranches: size & stage– time horizon
• Risks– technical, commercial, financial– high probability of failure– understood, shared, managed
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Structure of venture capital
• Large institutional investors – reliant on intermediaries for local knowledge
• Reputation – as “signal”
• representing experience and riskiness
– as “screen”• representing nature and value of opportunities
• An implicit or shadow market– relationships, networks, partnerships
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Trust becomes essential
• Intermediaries unable to specify risk parameters• Payoffs uncertain, compared to alternatives
– in time– in magnitude
• Commitment a critical element within partnership• Repeat “game” interaction
– players known– past outcomes known
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Trust communities
• A response to the problem of risk management– reliant upon highly interconnected networks– based on local institutions
• meeting, information exchange, negotiation
• social and cultural identification important
• prospect of “community” approbation– betrayal punished and broadcast
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
The role of geography
• Sets – economic context, especially re nature of innovation– boundaries of financial and social relationships– social parameters and norms
• Private equity– as opposed to publicly traded and regulated markets– without formal regulation within or between
institutions and investors
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
US VC investment, 2002
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
UK VC investment, 2002
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Investing in the familiar
• Highly mobile capital, and yet…
• Benefits of – collocation– relational transaction – spatial agglomeration – local investment
IMPLICATIONS FOR FINANCING OF CLUSTERS OF INNOVATION
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Review of empirical findings
• Focus on – ICT & biotech– London & Boston– 2002-04, i.e. emerging from TMT bubble– Methodology qualitative and quantitative
• Work sought to address gap in VC research, i.e. largely undersocialized– Yet relationships essential to decision-making and
risk mitigation/management– Function of trustworthiness - or identity and shared
experience as its proxy
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Compare Boston and London
• Risk communities can be “open” or “closed”
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Innovation center networks
• Differences in degree of openness• Importance of social identity
– variously defined
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Q methodology
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
7 Cs*
1. Capital2. Capability3. Creativity4. Culture5. Cluster6. Connection7. Collaboration
*An 8th C of competition is pervasive throughout each of the 7
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Implications of our 7 Cs
• Guide dialogue and ultimately action– Contribution to literature and practice– Decision-makers often address one or a few
variables but infrequently all and never simultaneously, coherently, and comprehensively
– Incentive alignment essential, local to global, for competitiveness and welfare alike
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New Finance of America’s Cities Babcock-Lumish Cambridge 2007
Further reading• Babcock-Lumish, T. L. (2005) Venture capital decision-making and the cultures
of risk: an application of Q methodology to US and UK innovation clusters. Competition and Change, 9, 329-356.
• Babcock-Lumish, T. L. (2007) Trust: the relational dynamics of innovation investment communities. Working Paper, 1-33.
• Clark, G. L. & Freeman, R. B. (2007) Global Finance, the New Economic Geography and Community Welfare. New Finance of America's Cities Research Symposium. Cambridge.
• Babcock-Lumish, T. L. & Clark, G. L. (forthcoming 2008) Pricing the economic landscape: global financial markets and the communities and institutions of risk management. IN Wescoat, J. L. & Johnston, D. M. (Eds.) Places of Power: Political Economies of Landscape Change: Places of Integrative Power. Dordrecht, Springer.
Questions?