Startup Global Audio Interview with Richard Florida
Our hypothesis was that venture capital was no longer just going into these suburban innovation centres—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 to places like downtown London or downtown lower Manhattan and 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 neighbourhoods, as well as the cities and metros venture capital is going to, and not only that but 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 defined by industry codes. What venture capital investment gives you is this incredibly highly calibrated commercially valued measure of innovation, like this is a startup company that’s 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 who I knew Martin Kenney who I subsequently wrote several books with and numerous papers—Martin Kenney walked into my office, I had written a thesis on housing and financial markets, Martin had written a thesis and book on biotechnology, we said what can 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 and we interviewed all of the great venture capitalists; all of the people who started the industry and we went up to the Boston and interviewed the venture capitalists in Boston. We found something very interesting, that there were major financial centres, like New York or London or Chicago that would raise funding, had 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 outside of Boston and 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 a great university, it had to have entrepreneurs, 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 attracter 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 Reuters data—but we can now actually pinpoint the addresses of venture capital funded investments. According to our data, venture capital is 40–50 billion dollars in investments 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, redefine industries. That investment really is industry defining, 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 all those communities, Palo Alto, 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 25 percent of the world total. What’s also interesting is how spiky and concentrated venture capital investment is, the top ten metros in the world account for more than half of all venture capital investment and I’m talking about that’s where it goes, 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 percent of that investment. So, it’s incredibly concentrated and spiky but it’s increasing concentrated in these global superstar cities. There is 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 you know we are seeing this increasing flow of venture capital investment to these very dense, walkable, pedestrian-friendly, transit served urban zones. Venture capital increasingly is being invested in high-tech companies, startups are being formed where really talented, interesting, creative, and ambitious people want to be and increasingly those kinds of people are found not in typical suburbs or what we like to call “nerdistans,” they are found in these urban centres. The fact that venture capital was invested for so long in the Silicon Valley, in the area around Boston, in the 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 in my other work, it emerged precisely because it is outside of San Francisco. San Francisco was always a creative, artistic, cultural, counter-cultural mecca where different thinking and different kinds of people like Jobs and Wozniak with their long hair, with their beards, with their love of The Beatles, with their love of the counter-culture, with their Volkswagen buses, with hippie culture could come and be accepted. So I think that’s all the reason, I think what’s even more striking, and of course San Francisco was 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. You know, 20 or 30 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 or 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 are talent magnets because young people care about creativity 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 Francisco or San Jose but they are increasing so I think that’s one of the things that we are seeing, venture capital is concentrated, it is increasingly concentrated in urban centres instead of suburbs and it is moving to some degree, or the number of venture capital centres—high-tech venture capital centres—is expanding, it is 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 through these ecosystems or clusters that are creating good startups and the venture capital will go where the good startups are. Those startups for a long time had been in the Silicon Valley area and now they are in other parts of the world as well.
Yes, there is investment—Shanghai, Beijing are among the top 20—I’m not convinced that they are real hubs of the kind of high-technology propulsive startups that you find in the Bay Area or in New York or London. My hunch in this is that it’s the big, open, tolerant, diverse cities—the places that I think we are going to see high-technology clusters, new creative industries—they are going to happen in these 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, of course places like greater Boston have some of these characteristics but you know then you see places like Toronto, Montreal, Vancouver, and yes, Chinese cites are doing better Shanghai and Beijing, yes, Mumbai and Bangalore but still to a large degree the best and brightest young people and entrepreneurs for those countries tend to move to bigger more vibrant global cities, they’ll move to New York, 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 to support the development of clusters and they help do that but I still think there’s still a major draw to the major cities in the advanced world and in West.
“Startup Global Audio Interview” from Startup Global by Richard Florida. Released: 2016. Copyright: Martin Prosperity Institute.