“Location, location, location,” is known as the real estate agents’ mantra.
According to assistant professor Jorge Guzman, the phrase is also applicable to entrepreneurship and startups, particularly those in the technology industry.
“When it comes to startups, location matters,” Guzman says. “It helps you connect with the ideas around you, find capital, hire employees, and even impacts whether you become an acquisition target or not.”
For many entrepreneurs and startups, that place is the United States, but more specifically Silicon Valley, which continues to be the hub for financing, patents, and the promise of profit in the tech world. “The key question is what creates a good entrepreneurial ecosystem, and how should entrepreneurs take advantage of the ecosystem given their own personal situation and unique abilities and background,” Guzman says.
Guzman begins to understand the US ecosystem in a recent working paper, “What is the US Comparative Advantage in Entrepreneurship? Evidence from Israeli Migration to the United States,” co-authored with Annamaria Conti of the University of Lausanne. Guzman and Conti demonstrates that firms that move to the United States tend to fare better in fundraising, are more likely to be acquired, are worth more than companies that stay in Israel, and introduce more products.
“People say that the US is where the innovation is happening, and that it is a big market,” Guzman says. “But we wanted to try to understand the US competitive advantage with respect to entrepreneurship.”
The researchers were interested in economic figures emerging out of Israel, which in the past 30 years has seen a rise in entrepreneurial clusters and startups, earning it top spots in economic rankings by both the Organisation for Economic Co-operation and Development and the World Economic Forum
Guzman and Conti gathered data from 2,179 startups founded between 1990 and 2014. Thirty-four percent of the companies applied for US patents and 290 of them registered for business with individual state governments.
Using that data, they employed an algorithm to predict how successful startups and entrepreneurs would be if they migrated to the United States.
“We found that those that moved performed better in some dimensions than those that stayed in Israel,” Guzman says. “They raised more money and were acquired at higher valuations; however, they did not innovate more. This reflects the strength of the US entrepreneur ecosystem compared to Israel.”
Guzman then considered more clearly the entrepreneurs’ choice of location in his 2019 working paper “Go West Young Firm: Agglomeration and Embeddedness in Startup Migrations to Silicon Valley,” which examines the costs and benefits of moving a firm from an outlying location to the Bay Area. “The key trade-off is one of networks versus resources. Even if Silicon Valley has all the capital, entrepreneurs might feel they cannot access it if they don’t have the network there. Potentially, they should instead stay in their home base, where they do have connections.” His research, however, demonstrates that being closer to resources is more important than the proximity to a “home location.”
“Agglomeration matters much more than embeddedness,” Guzman says.
Embeddedness, a term borrowed from sociology, includes non-economic relationships, such as families, ethnic bonds, or friendships that can assist in a company’s productivity. Guzman notes that in this model, entrepreneurs tend to hire within social networks and secure bank loans through personal relationships, which can be useful for smaller-scale firms.
“If you open a hairstyling salon, for instance, personal contacts can very beneficial,” Guzman says.
On the other hand, agglomeration focuses less on personal networks and more on how the distance from resources such as talent, goods, and ideas affect the productivity of a company.
According to Guzman, for businesses such as technology firms, the agglomeration model leads to greater productivity and financial benefits.
“A company should move to where the best resources are located, as long as the benefit covers the cost of moving,” Guzman writes in “Go West Young Firm.” “If it is a venture capital-oriented IT, hardware or biotechnology company, this destination might be Silicon Valley.”
In that regard, Guzman says that modern agglomeration is not unlike older economic models, such as locating shipping companies near harbors, where there are resources and workers but, most importantly, ideas.
Guzman says the internet-driven tech economy, instead of allowing ideas and innovation to flourish anywhere, has forced people to be in the same location.
“It’s paradoxical, but it turns out that goods travel more easily than ideas,” Guzman says. “Big ideas travel only a 15-minute drive in Silicon Valley, so it requires almost a face-to-face level interaction for ideas to happen in the fastest way.”
Read the original piece on Columbia Business School’s Ideas and Insights blog.
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