Venture Capital Investment in Secondary Cities: Issues and Opportunities for Impact

Venture capital has been one of the major drivers of the U.S. economy. Using the State of the Inner City Economies database of the Initiative for a Competitive Inner City, we found that secondary cities – which we have defined as cities outside the 40 largest U.S. metro areas – have received far less than their proportionate share of private equity deals and dollars. By failing to attract capital at similar rates to larger cities, secondary cities are missing a major engine of job and wage growth. Notably, however, a number of secondary cities have managed to assemble the right combination of factors to significantly outperform their peers. To understand this better, we interviewed the leaders of 17 venture capital firms (including both national firms and regional firms and firms representing more than one-half of the top 10 investors in secondary markets). We also interviewed and surveyed 53 companies in secondary markets that successfully received venture capital investment funds, as well as industry experts and venture funding facilitators. Based on these interviews and surveys, our research posits six plausible factors that enable successful secondary cities to attract more venture capital than their peers. Carole Carlson is Managing Director of Carlson Partners Consulting, a consulting firm that advises private sector and nonprofit clients on business strategy, economic impact, and organizational effectiveness. She is an adjunct faculty member at Brandeis University's Heller School for Social Policy and Management. Prabal Chakrabarti is deputy director of Community Affairs at the Federal Reserve Bank of Boston. Formerly, he served as deputy director of research at the Initiative for a Competitive Inner City (ICIC). The study was conducted in partnership with ICIC, with financial support from the W.K. Over the past two decades, venture capital (defined as at-risk equity investments provided by investors to privately held companies with perceived long-term growth potential) has been one of the major drivers of the U.S. economy. As a source of financing for early stage companies, venture capital investors make high-risk, high-reward investments that support high growth companies and foster innovation. Companies that received venture funding between 1970 and 2003 accounted for 10.1 million jobs in 2003. 1 The venture capital industry has organized itself to maximize profits by focusing on a select group of high growth industries and has also tended to focus on specific geographies. As a result, the benefits of venture capital investment are unevenly distributed: Fully …