The Connection Between Venture Capital and Diverse, Dense Communities

By SA2020 | Aug 8 2013

Atlantic Monthly | Cities

By Richard Florida, July 09, 2013


This is the fifth in a series of posts examining the new geography of venture capital and high-tech start-ups.

As cities and metros around the country and the world try to bolster innovation, spur entrepreneurship, encourage venture capitalism, and generate more start-ups, an important question to ask is: What are the key characteristics of leading-edge start-up cities and their ecosystems?

In previous posts, I’ve mapped the geography of venture capital investment and start-up activity across U.S. metros and global cities. My task now is to break down the characteristics of metros that are associated with higher levels of venture capital investment and high-tech start-ups.

To get at this, my Martin Prosperity Institute colleague Charlotta Mellander ran a correlation analysis of the economic, demographic and social factors that are associated with venture capital investment across metros. Obviously, bigger metros will attract more venture capital on balance. To control for this statistically, Mellander ran a partial correlation analysis that controls for metro population. The two correlations I’ll list in parenthesis below cover the number of venture capital investments as well as the dollar amount of these venture capital investments. As usual, I emphasize that correlation does not equal causation. Still, the results point to some interesting new patterns and insights.

Venture capital investment, it has long been said by those in the business, follows the quality of deals. So it is not surprising that we find venture capital investment to be significantly associated with both levels of metro innovation and high-tech industry, being correlated both with patents per capita (.51, .43) and even more so with the concentration of high-tech industry (.77, .70). This is squarely in line with studies that have found that venture capital investment is attracted to areas with large clusters of high-tech industries and high levels of innovation.

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