Why Silicon Valley Outmuscles New England in Venture Capital

SMITH BRAIN TRUST — Technology entrepreneurship and venture capital were born and grew up along the U.S. East Coast, so why has Silicon Valley dominated the Cambridge-Boston area in venture capital investments for so long? For years the disparity has been attributed to Silicon Valley's less-hierarchical and more-risk-taking culture. It also has been seen as a result of California's long ban on noncompete covenants in employment contracts, which experts say helps create a less loyal, more free-wheeling talent pool, and forces Bay Area companies to become broadly more competitive.

But Anil K. Gupta, management and organization professor at the University of Maryland Robert H. Smith School of Business, and Haiyan Wang, managing partner of the China India Institute, writing in the Harvard Business Review, say they have come up with three other factors likely driving the divergence.

The first factor is the digital transformation that began in the 1990s in retail, music and movies, and that now grips all industries. New England has through the years evolved as a sort of hub for life sciences technology, while Silicon Valley became the destination for digital labs of companies of all kinds — education, financial services, cars and trucks, transportation services, energy and the environment, hospitality, manufacturing and even shipping. The essential platform technologies — sensors, search, social media and artificial intelligence — are dominated by Silicon Valley.

The second factor is that Silicon Valley has become a master at the art of "scaling up," or growing a small firm into a big player. And that has created a deep pool of experienced entrepreneurs and others who are ready to start, join, invest in or otherwise help new startups. And that helps entice startups elsewhere to relocate to California, Gupta and Wang say, most notably Facebook, which Mark Zuckerberg launched in his Harvard dorm room and relocated to Menlo Park, Calif.

The third factor is money. Past successes have drawn attention, and that's helped draw more private capital to the region. Today, new ventures can raise "extremely large sums of capital without the necessity of a public listing," the authors write, citing Uber as an example. The ride-sharing firm has a market valuation that is said to top $60 billion, it's still a privately held company. 

Today, nearly 50 percent of all VC investments in the country go to Silicon Valley – far more than the 10 percent that go to New England, the authors write. The imbalance has grown more striking in the past two decades. In 1995, 22.6 percent of VC investments in the country went to Silicon Valley, compared to 9.9 percent for New England. 

The same factors that have fed Silicon Valley's dominance are playing out in other major economies as well, say Wang and Gupta, who is also the Michael Dingman Chair in Strategy, Globalization, and Entrepreneurship at the Smith School and cofounder of the China India Institute. An increasing concentration in a small number of software-centric hubs is likely to emerge, they say, in Beijing, Bangalore, Tel Aviv, London and Berlin.

"Tech entrepreneurs of the world, take note," they write. "In our view, unless you are launching your venture in a domain-focused hub – such as New England for life sciences – you may want to consider relocating to one of the world's software hotspots. By all accounts, software is likely to keep devouring the world."