Can Smaller Cities Compete with the Country’s Most Successful VC Markets?

According to the latest stats on venture capital investments, half of all U.S. VC investment during the last quarter of 2006 supported companies in two small areas of the country: Silicon Valley and New England (primarily the Boston metro area). With the exception of only a handful of other large metro areas and, since the origin of the modern venture capital industry some 25 years ago, most other cities have struggled to attract the attention of venture capitalists. This struggle can be especially difficult for the nation’s secondary cities – cities that do not rank among the 40 largest metropolitan statistical areas. According to the Initiative for a Competitive Inner City (ICIC), these cities receive only 13 percent of all venture capital deals and only 20 percent of total investment dollars. Though these cities account for approximately half of the U.S. population and U.S. business establishments, they have not experienced a proportional benefit from the venture capital revolution.

A recent study published by the Federal Bank of Boston argues that secondary cities can adopt certain strategies to successfully lure venture investment to their region. Authors Carole Carlson and Prabal Chakrabarti examine the venture market in the secondary cities of New England to identify factors that have led to success outside of the Boston-Route 128 area. New England represents a particularly important region for study, since six of the top 10 secondary venture markets are located in Massachusetts, Connecticut and Rhode Island. The authors interviewed executives from 17 regional and national firms comprising more than one-half of the top 10 investors in secondary markets and 53 companies in these markets that recently had secured venture funding.

Carlson and Chakrabarti conclude that there are six factors that contribute to a thriving secondary venture market. Smaller cities with significant venture capital investment often possess clusters that focus on particular industries. These clusters grow because of formal and informal linkages between individuals and business, which can attract the attention of venture firms. These communities often have local angel investors that provide vital early investment for new companies, and, over time, can offer a proven local track record for investment. Successful secondary cities also tend to have direct access to larger venture markets, either through highways or direct flights.

Possible strategies for secondary cities include:

• Strengthening Clusters and Networks – Use local groups and virtual organizations to bring together investors, entrepreneurs, researchers and other parties to establish formal and informal relationships.
• Encouraging a Continuum of Capital – Support local angel capital investors who can nurture early-stage companies and produce more opportunities late-stage venture investment.
• Increasing InvestmentLevels – Seek out alternative models of investment, including venture firms that target their investments towards smaller communities and regions with specific strengths.
• Enhancing Community Attractiveness and Accessibility – Tailor municipal policies and programs to support entrepreneurship and encourage direct flights to the city from key capital markets.

The 10 highest-performing secondary cities in the U.S. (ranked by number of private equity deals per city) are (1) Boulder, Colo., (2) Salt Lake City, (3) Westborough, Mass., (4) Ann Arbor, Mich., (5) Norwalk, Conn., (6) Providence, R.I., (7) Southborough, Mass., (8) Stamford, Conn., (9) Melbourne, Fla., and (10) New Haven, Conn.

Source: Initiative for a Competitive Inner City.

Read “Venture Capital in New England Secondary Cities” at: http://www.bos.frb.org/commdev/necd/2007/issue1/venturecap.pdf