The Silicon Valley and Route 128 have long been identified as the homes of venture capital. For the unitiated, that’s the San Francisco and Boston areas. Throw New York in the mix and the three regions are home to nearly half of all VC firms and a like number of VC-backed companies.
The State Science & Technology Institute reviews some recent research that says what appears to be bad news (it is in some respects) for other parts of the country has some silver linings for investors.
Venture firms exhibit a strong local bias, according to the study. A firm is almost six times more likely to invest in a local firm, controlling for other factors. The authors note, however, that out-of-region investments have a higher success rate than in-region investments. One explanation is that firms have a higher barrier to investing out of their home region and tend to restrict their investments to low-risk and higher-yield opportunities.
Despite the greater likelihood of success in out-of-region investments, firms based in venture capital centers outperform firms in other locales. These regions have a greater number of opportunities, pools of talented employees and benefit from knowledge spillovers. The authors suggest that this concentration may be a rational allocation of resources and make sense for investors.
The researchers advise that anything a region can do to increase the number of successful venture-backed investments in a region can greatly increase the likelihood of future deals. Once a region has experienced a few successes, they are much more likely to become the home of branch offices, which in turn are prone to invest locally. Also, once a firm has invested in an out-of-region area, they are much more likely to invest in that region in the future.
Indiana has certainly seen increased outside investment and realized some success stories. More of each will lead to … more of each.