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

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

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

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

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

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

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

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

New Finance of America’s Cities  Babcock-Lumish  Cambridge 2007 US VC investment, 2002

New Finance of America’s Cities  Babcock-Lumish  Cambridge 2007 UK VC investment, 2002

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

New Finance of America’s Cities  Babcock-Lumish  Cambridge 2007 Review of empirical findings Focus on –ICT & biotech –London & Boston – , 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

New Finance of America’s Cities  Babcock-Lumish  Cambridge 2007 Compare Boston and London Risk communities can be “open” or “closed”

New Finance of America’s Cities  Babcock-Lumish  Cambridge 2007 Innovation center networks Differences in degree of openness Importance of social identity –variously defined

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

New Finance of America’s Cities  Babcock-Lumish  Cambridge Cs* 1.Capital 2.Capability 3.Creativity 4.Culture 5.Cluster 6.Connection 7.Collaboration *An 8 th C of competition is pervasive throughout each of the 7

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

New Finance of America’s Cities  Babcock-Lumish  Cambridge 2007 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, Babcock-Lumish, T. L. (2007) Trust: the relational dynamics of innovation investment communities. Working Paper, 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?