Wednesday, November 18, 2009

Geography of Angel Investors

Urban agglomeration is one of the defining features of globalization. People and firms will bear very high costs in order to benefit from the proximity advantage. I think this is a function of trust. Deals happen and knowledge exchange occurs thanks to a face-to-face interaction. A story about angel investors in The Business Journal is a great example of this kind of behavior:

Angel investors bless entrepreneurs with capital and the know-how to build successful companies, and bless communities with new jobs. Securing funding from angel investors, however, is no easy task, says Catherine V. Mott (WATCH VIDEO), president, CEO and founder of BlueTree Capital Group and BlueTree Allied Angels in Wexford, Pa., a suburb of Pittsburgh.

Mott, who holds an MBA in finance from Youngstown State University, returned to her alma mater Nov. 17 to discuss angel venture capital with students, faculty and members of the community as part of the Williamson Symposium series. ...

... BlueTree Allied Angels focus on “early stage technology companies,” 50% of which are in the healthcare and life sciences fields. That’s because there is a heavy concentration of companies in those disciplines in the Pittsburgh area and angel investers typically invest “in their own backyard,” Mott said.

They invest in the company’s very early stages, “right after family, friends and fools,” and want to be involved in the business to help ensure its success and a return on their investment, Mott stressed. So, she explained, they typically don’t invest in companies outside of a two-to-four hour’s drive. “They want to be able to ride past and see that the lights are on.” Mott described the angels’ involvement in the startups they fund as “an active watching of their money.”

That reach would make angels less risk averse than your typical venture capitalist, many who employ the 20-minute rule:

Meet the “20-minute rule” that guides fateful decisions in Silicon Valley. Craig Johnson, managing director of Concept2Company Ventures, a venture capital firm in Palo Alto, Calif., who has 30 years of experience in early-stage financings, said he knew many venture capitalists who adhered to this doctrine: if a start-up company seeking venture capital is not within a 20-minute drive of the venture firm’s offices, it will not be funded.

Mr. Johnson explained that close proximity permits the investor to provide in-person guidance; initially, that may entail many meetings each week before investor and entrepreneur come to know each other well enough to rely mostly on the phone for updates. Those initial interactions are fateful. “Starting a company is like launching a rocket,” Mr. Johnson said. “If you’re a tenth of a degree off at launch, you may be 1,000 miles off downrange.”

Capital and attention are lavished on entrepreneurs in the Valley as in no other place. Ten years ago, when Dow Jones VentureOne began a quarterly survey of where venture investments landed, one-third of all deals in the country went to the San Francisco Bay Area. Since then, the same share of deals has gone to the same place, almost without variation. Most recently, in the first six months of this year, Silicon Valley still pulled in 32 percent; the region with the second-largest total, New England, was far behind, at 10 percent.

The concentration of venture capital in a few places is textbook urban agglomeration. There are downsides to this economic geography. First, the cost of living or doing business goes up dramatically as more ambitious people cram into an innovation hub. Second, the investment market is limited and dramatic returns are increasingly rare. How might some of this money find its way out of Silicon Valley and well beyond the 20-minute limit?

AnnaLee Saxenian answered this question in her book "The New Argonauts". Foreign born entrepreneurs in Silicon Valley would return home and take the trust of venture capitalists with them. Of course, some of them are the venture capitalists. They move to Israel or India in order to be closer to the investment. On the backs of these cosmopolites, Silicon Valley expands its reach.

Which brings me back to Catherine V. Mott. She represents an opportunity for Pittsburgh venture capital to explore the Mahoning Valley. Mott leaving Youngstown could be a good thing if locals understood her willingness to give back to this community. Her success in another city should be cause for celebration. Mott is the exception to the proximity rule, which is what Greater Youngstown 2.0 is all about.

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