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FINANCING CLUSTERS OF INNOVATION: the geography of venture capital investment, US & UK

FINANCING CLUSTERS OF INNOVATION: the geography of venture capital investment, US & UK. Terry L. Babcock-Lumish University of Oxford Islay Consulting LLC New Finance of America’s Cities Research Symposium December 10-11, 2007 Cambridge, Massachusetts. Introduction .

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FINANCING CLUSTERS OF INNOVATION: the geography of venture capital investment, US & UK

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  1. FINANCING CLUSTERS OF INNOVATION:the geography of venture capital investment, US & UK Terry L. Babcock-Lumish University of Oxford Islay Consulting LLC New Finance of America’s Cities Research Symposium December 10-11, 2007 Cambridge, Massachusetts

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. US VC investment, 2002

  10. UK VC investment, 2002

  11. 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

  12. 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

  13. Compare Boston and London • Risk communities can be “open” or “closed”

  14. Innovation center networks • Differences in degree of openness • Importance of social identity • variously defined

  15. Q methodology

  16. 7 Cs* • Capital • Capability • Creativity • Culture • Cluster • Connection • Collaboration *An 8th C of competition is pervasive throughout each of the 7

  17. 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

  18. 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?

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