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Read a transcript of the podcast

Our hypothesis was that venture capital was no longer just going to be suburban innovation centers like the Silicon Valley or the area outside of Boston, or the suburbs of Austin Texas, or the suburbs of Seattle and their equivalents around the world. It was coming into these urban regions, these urban centres.

It was going into places like downtown London or downtown lower Manhattan in New York, or the urban districts of San Francisco.

And also, our second hypothesis was that venture capital was not just a U.S. phenomenon. It had been mainly, and to some degree still is. But it had been a global phenomenon. So that’s what our work was able to look at. What were more precisely the neighborhoods as well as the cities and metros venture capital was going through, and not only that, where were the centres of venture capital around the globe. Many people look at innovation or high tech industries, but they look at patents as a measure of innovation. Or they look at high tech industries to find by industry code. What venture capital investment gives you is this incredibly highly calibrated commercially valued measure of innovation. Like this is a start-up company that is creating something of real value, and you can value it and you can plot it geographically.

I’ve been interested in venture capital investment for nearly my entire career. I began as an assistant professor at Ohio State University in 1984. And during my first month there another professor, a guy named Martin Kenney, who I subsequently wrote several books with and numerous papers. Martin Kenney walked in my office. I had written a thesis on housing and financial markets. Martin had written a thesis and a book on biotechnology. We said what could we do to work together? This idea popped into our minds; venture capital.

And so, Martin and I wrote probably a dozen papers. We went out to Silicon Valley and we studied venture capital in the Bay area. We interviewed all of the great venture capitalists, all of the people who started the industry. We went up to Boston and interviewed the venture capitalists in Boston.

[00:01:55]

We found something very interesting, that there were major financial centres, like New York or London or Chicago that would raise funding, have raised venture capital money, but they had virtually zero investment in high tech venture capital. That money was essentially shipped out to these new high tech areas, the Silicon Valley in California, the area around, outside of Boston in the suburbs around the Route 128 beltway that had developed these high tech clusters. And we actually called it a social structure for innovation, we identified that it had to have the great university, it had to have entrepreneurs, and it had to have people who knew how to build businesses. It needed to have legal services and consultancy firms. These localized hubs of activity with local venture capitalists, who grew up indigenously, often from companies. They had started a successful company and gotten wealthy. They were the attractor of capital from other parts of the world, but all of that venture capital was going into a very small subset of these high-tech social innovation centres.

I was away from this work for several decades. New data has become available from a variety of sources. We used Thomson Returners data. But we can now actually pinpoint the addresses of venture capital-funded investment. According to our data venture capitalist is $40 to $50 billion dollars in investment spread across the globe. That’s a lot of money. And more than that, that investment of $40 or $50 billion dollars has extraordinary effects because it creates the companies that redefine our world, redefine markets, and redefine industries. That investment really is industry defining and industry making and quite disruptive.

What’s really interesting about it is how concentrated venture capital investment is. The San Francisco Bay area, that includes the Silicon Valley proper surrounding Stanford University and San Jose and Mountain View and Palo Alto and all those communities. But increasingly the urban centres of San Francisco account for $10 or $11 billion dollars in venture capital a year, which is quite significant. You know that’s like 25 per cent of the world total.

What’s also interesting is how spikey and concentrated venture capital investment is. The top 10 metros in the world account for more than half of all venture capital investment. And when I’m talking about it, that’s where it goes. So they’re attracting more than half of all venture capital investment. The top 20 metros, that’s 20 metros globally — there are thousands of metros across the world — account for two thirds, and the top 50 metros that attract venture capital investment attract 90 per cent of that investment. So, it’s incredibly concentrated and spikey but it’s increasingly concentrated in these global superstar cities. But there’s still a lot of suburban venture capital but more and more it is heading into these dynamic, diverse, dense, mixed use urban zones.

So the example that I like to talk about; there are two billion dollar venture capital neighbourhoods in the world. They are both in downtown San Francisco. And when you look at the leading neighbourhoods of venture capital investment, we are seeing this increasing flow of venture capital investment through these very dense, walkable, pedestrian-friendly transit suburban zones; venture capital increasingly is being invested in high tech companies, start-ups are being formed where really talented and interesting and creative and ambitious people want to be, and increasingly those kinds of people are found, not in typical suburbs of what we like to call ‘nerdestans’; they’re found in these urban centers.

The fact that venture capital was invested for so long in the Silicon Valley, in the area around Boston, in areas of Austin Texas and Seattle, creates enduring advantage. The other advantage, of course that the U.S. had is that the Silicon Valley isn’t in the middle of nowhere, and I’ve argued this is in my other work; it emerged precisely because it’s outside of San Francisco. San Francisco was always a creative, artistic, cultural counter-cultural mecca where different thinking, different kinds of people like Jobs and Wozniak — with their long hair and their beards, their love of the beetle and their Volkswagen buses, their love of the counter culture and hippy culture — could come and be accepted.

So I think that’s all the reason. I think what’s even more striking though — and of course San Francisco is first, San Jose is second, Boston remains third. But what’s interesting to me is how far up the ladder places like New York and London have come. Twenty or thirty years ago when Kenney and I were doing our research, there was virtually no venture capital invested in New York City or London or Berlin or Shanghai, Mumbai or Paris or Bangalore. All cities that are now amongst our top 20; the big cities because people want to be there because they’re talent magnets, because young people care about creativity have become — and because they have great universities — have become these new hubs of venture capital investment.

And you know New York is now attracting two or three billion dollars a year. London is attracting roughly a billion dollars a year. Toronto and Montreal and Vancouver are not at the scale of San François or San Jose, but they are increasing. So I think that’s one of the things that we’re seeing. Venture capitalists concentrated, it’s increasingly concentrated in urban centre instead of suburbs. And it is moving to some degree or the number venture capital centres, high tech venture cap centres is expanding.

It’s not everywhere but bigger cities are able to compete more effectively to attract that talent, and develop the high tech companies and attract venture capital investment.

It’s not that venture capital generates economic success. Venture capital investment flows to these ecosystems or clusters that are creating good startups. And the venture capital would go where the good startups are. Those start-ups for a long time have been in the Silicon Valley area. Now they are in other parts of the world, as well.

[00:07:41]

Yes, there is investment; Shanghai and Beijing, are among the top 20. I’m not convinced that they are real hubs of the kind of supply technology propulsive starts ups that you find the Bay area, or New York, or London. My hunch in this is it’s the big, open, tolerant, diverse cities, the places that I think we’re going to see high technology clusters, new creative industries; they’re going to happen in these big metropolitan and megalopolitan centres, places that can attract talent from around the world that are open-minded, that have great universities that function as talent magnets so, obviously New York, London, all of the world’s great mega cities.

And then, of course the Bay area; places like greater Boston have some of these characteristics. But then you see places like Toronto, Montreal, Vancouver, and yes, Chinese cities are doing better; Shanghai, and Beijing, Mumbai and Bangalore. But still to a large degree the best and brightest young people and entrepreneurs from those countries tend to move to a bigger, more vibrant city. They’ll move to New York, they’ll move to London, they’ll move to the Bay area. They might come to Toronto or Vancouver. So, I think that’s a big advantage of these so called Western or more advanced cities.

Now what’s happened, of course in Asia is as some of those entrepreneurs become more successful they benefit from, not brain drain but brain circulation. People go back home. They want to support the development of entrepreneurial networks in their home country. They want to support the development of clusters, and they help do that. But I still think there is still a major draw to the major cities in the advanced world and in the West.