Economics and Entrepreneurial Finance
(I seem to have the blogging bug today, so I’ll take the advice on my last post and blog shamelessly about my new article!)
Economic theory holds that money is fungible: any unit of money is an adequate substitute for another. But my research on entrepreneurial finance, which analyzes and compares different sources of financial capital available to high-tech start-ups, suggests that this isn’t always the case. In my new article Financing the Next Silicon Valley, I show that differences in financing options may explain why we don’t have more Silicon Valley-like regions in the U.S. With our other economic engines (manufacturing, financial services) in rapid decline, a competitive economic strategy for our nation must include more tech-driven innovation. Entrepreneurial finance is a huge part of that (after all, what do start-ups lack: money!), and not all money is created equal.
My article compares three major financing sources for start-ups: private venture capital, state-sponsored venture capital, and angel investor groups. Private VC is smart money – the dollars also come with the VC’s expertise on start-up development and networking benefits. (Case in point: eBay went with the Silicon Valley VC Benchmark Capital primarily for the VC’s connections, which led to Meg Whitman taking on the CEO position.) But on the downside, private VC is heavily concentrated in existing tech regions like Silicon Valley, and also not available to the early-stage start-ups that need it most. In step the states, which set up their own VC funds with taxpayer dollars to try and fill the financing void for their neglected, home-grown start-ups. But the states, without any expertise in this area, just muck it up with their inability to pick the best start-ups ex ante or help them develop ex post. A new solution, the angel investor group, offers more hope for the future. Like private VC, angel groups are private actors who offer smart money; like state VC, that money is spread out to more regions and available to early-stage start-ups. It’s the best of both worlds.
In short, comparative entrepreneurial finance is important, both theoretically and practically. This sort of money, contrary to popular economic thinking, is not all fungible.