Terry Babcock Lumish Presentation

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

Terry L. Babcock-LumishUniversity of OxfordIslay Consulting LLC

New Finance of America’s Cities Research Symposium December 10-11, 2007Cambridge, Massachusetts

http://www.ox.ac.uk/

New Finance of America’s Cities Babcock-Lumish Cambridge 2007

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



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



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



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



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



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



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



US VC investment, 2002



UK VC investment, 2002



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



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



Compare Boston and London

• Risk communities can be “open” or “closed”



Innovation center networks

• Differences in degree of openness• Importance of social identity

– variously defined



Q methodology



7 Cs*

1. Capital2. Capability3. Creativity4. Culture5. Cluster6. Connection7. Collaboration

*An 8th C of competition is pervasive throughout each of the 7



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



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?


Terry Babcock Lumish Presentation

Economy & Finance

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