How Geography Shapes Entrepreneurial Ecosystems
Patterns of Spatial Inequality
This article is a part of the book “How to Build Thriving Start-up Ecosystems: Five Information Patterns for Success.”
Some fortunate universities are positioned to take advantage of “natural” innovation networks that attract a disproportionate percentage of venture investment by being located within Innovation Districts. Innovation Districts are often downtown areas with universities, large businesses, cafes, and start-ups all located in close proximity that promote the social networks that help founders be successful. However Innovation Districts tend to be very small. It is estimated these spaces encompass approximately 20 out of 3.8 million square miles of the continental United States, or only .0000005% of the country’s land.
States Away
Entrepreneurs are often encouraged to move to these natural networks, such as Silicon Valley, downtown L.A., San Francisco and downtown New York, to build their companies. For good reason too, since Silicon Valley alone accounts for 50% of venture deals done in the United States in 2019, totaling some 46 billion dollars. Eighty percent of investors invest within forty miles of where they live, and this in turn impacts the perception of where the most investable deals are. Meanwhile forty percent of all high-scoring start-ups in the world on AngelList’s “Signal Score” are located in either L.A. or San Francisco.
Moving to these places is easier said than done. Since new founders are often told they need to move to Silicon Valley, successful founders often stay there, and tech companies locate their offices there to poach top talent, all of these various forces have driven up rent across the whole Bay Area. This means that when founders solve one problem — -access to natural investment networks through proximity — -they exchange it for another. Their chances of investment are higher, but so too are their costs.
In the early 2020s some venture investment has been pulled away from Silicon Valley and San Francisco, but has largely only escaped to other top-tier cities like New York City and Boston. There have been top-down efforts to create more deal-flow in the Midwest with the Rise of the Rest competition and Revolution’s seed funds, which has brought 150 million in capital to founders in what historically investors referred to as “fly over states.” Still the amount of deals made in every city in the Midwest combined does not reach half of the deals made in a handful of San Francisco’s city blocks.
Miles Away
Even if founders are lucky enough to live within states that have high rates of venture investment inflows, the distribution of opportunity is not spread evenly across these areas. There is an immense difference between the networks of a person who lives and works in the Bronx versus a person who lives and works in downtown Manhattan’s Silicon Alley. Building relationships demands an outlay of physical energy, and people will walk on average .30 miles to get to work and just .18 miles to go to social events. The people that founders can access for entrepreneurial networking events shapes an entrepreneur’s formation of weak ties, or people whom one has occasional contact with. Weak ties provide access to new information, new contacts and business leads outside of existing networks.
Weak ties can be incredibly beneficial to facilitate idea generation and accelerate commercialization. Bell Labs’ design of its campus which mixed people who had expertise in physics with electrical engineers and product-minded tinkerers churned out over 33,000 patents over the course of forty years. Just one mile of New Jersey was the birth place of the transistor, solar cells, lasers, and telephones.
However, there is another facet of weak ties that has not been acknowledged in the existing entrepreneurship literature. Weak ties with people who provide detrimental advice can have the opposite effect, dragging founders into unproductive pathways. When I attended both founder events in Silicon Alley and the Bronx, the differences in the information provided to founders was stark. In Silicon Alley founders learned how to do financial projections to analyze the likelihood of their revenue model’s success, and could pitch to accredited investors. At the Bronx-based founder events, the advice given was to take out personal loans to start a company, to have faith in God, and pitches from attendees included confidence gurus that could help founders “manifest” their company. Just like there are Innovation Districts, there are also Innovation Deserts.
Steps Away
Even if entrepreneurs live and work within Innovation Districts, the privatization of third spaces has created another impediment to the networks that provide founders with the resources and connections to successfully build a company.
“Hackerspaces” started as early as 1995 with Berlin’s C-Base as a community-oriented space for free thinkers. Co-working memberships in their modern iteration that provided paid space for freelancers to work started in 2005 with San Francisco Coworking Space. Since this time there has been an explosion of different co-working start-ups, such as WeWork, Industrious, and Impact Hub. There has also emerged dozens of specialty co-working spaces that focus on black entrepreneurs and freelancers like Atlanta’s The Gathering Spot, and women-focused spaces like the Riveter.
Co-working spaces serve an important function to help founders build strong ties. Strong ties are essential to create the trust and vulnerability needed for two people to enter into a co-founder relationship or the kind of slow trust developed over time between founders and angel investors. However, with the average rent in the New York area as of September 2024 being around $3,863 per month and the average rent in Manhattan being $4,900, around sixty percent of New Yorkers are rent burdened. With the average New Yorker struggling to pay rent, it does not leave much room for the $425 USD on average each month for a co-working space.
Many might say, just go to a coffee shop to build a network. But increased urbanization and “hyper-gentrification” has meant that many local coffee shops in cities have closed. The coffee shops that remain have made it harder for people to dwell for long by making tables smaller or removing them entirely, disabling wifi, covering up charging ports, or not allowing patrons to use computers. While these coffee shops might need high turnover to keep up with rents, the result is that there are fewer places in the city for people from all walks of life to linger and build strong connections.
Access to places to build the kinds of trust networks that lead to partnerships and investment are blocked off to only those that can afford it. This does not mean that founders outside of these Innovation Districts cannot succeed, but it is much harder.
The challenges geography poses mean that the Community Information Designer’s role is pivotal to craft opportunity for their founders, first by providing them the tools within the university to rapidly build, test, and adapt, but also to help founders build the networks that will enable them to transition from university project to real-world start-up. Many existing ecosystem development books suggest to concentrate on the long-term development of mini-innovation clusters of accelerators and businesses in close proximity to universities.
This approach is a good one in the long term, but CIDs can also start immediately build out opportunity for founders by leveraging the unique facets of the communities around their ecosystem. A rural community that does not have natural proximity to a downtown might be able to provide space for founders that want to build larger robotics projects. A university located in a region with manufacturing plants can use the knowledge embedded in the community to help founders who pursue manufacturing start-ups. Each place has a strength, and good CIDs will look for ways to leverage these strengths to build not just a copy of Silicon Valley, but a unique start-up ecosystem for their communities.
