Beyond ROI

In a followup post to an earlier item about the availability of seed capital, venture investor Albert Wenger makes a very good point about the positive impacts startup companies have on their communities and human capital networks.  Whether a young company succeeds -- or even survives -- it generates benefits that don't necessarily increase the net worth of its founders and investors.

I had mentioned the experience gained by the entrepreneurs. But the human capital benefits don’t end there. All the employees and even the service providers accumulate knowledge and experience that outlives the startup. It goes even further though by having people who have worked together as a team, which means that they are much more likely and capable to work together on a new opportunity.

In fact, much has been written about how there is a significant network effect that occurs when you reach a sufficient density of startups. For instance, AnnaLee Saxenian examined the differences between Silicon Valley and Route 128 and identified network effects resulting from density and attitudes of startups as critical. Bijan has pointed out repeatedly how non-competes in the Northeast have been blocking some of that network effect. Critical here is the recognition that in a network effect setting there is significant value to the network that is not captured by the individual participant.

He goes on to point out that society has a compelling interest in the formation of startups, and that relying exclusively on returns to private equity to generate entrepreneurial activity may be insufficient to create the long-term network effect seen in established technology corridors.

There are powerful benefits that are not reaped by the individual startup. The net result of that is there is not enough startup activity if society relies on individual incentives alone.

He argues persuasively that public-private partnerships are needed to create the conditions which germinate and incubate startups as a stimulus for these secondary economic impacts that are beyond what the founders and seed investors accrue.