The immutable laws of venture capital

There’s a hot new idea floating around—something about the world being flat again. Have you heard it?

All kidding aside, Thomas Friedman’s spot-on analogy has become so entrenched in the business universe that it seems nothing short of a modern day Columbus—or even Copernicus—could dislodge it. So, my goal is not to further spread the words of Mr. Friedman, but rather to point out a few other immutable laws that still rule the universe.

1. Great ideas are the province of no particular continent, country or region. One look at the growth of certain venture capital sectors within the United States in recent years brings these points into sharp relief. Southern California, for example, has grown into a viable contender to be the No. 2 region in the country for venture investment, all within the last two years. This region has become a day trip destination for Silicon Valley VCs as well as a permanent home for VC transplants from other parts of the country. Other areas across the country that show promise include New Mexico, Florida, Connecticut and Utah. In the Midwest and Great Plains, where the landscape is already pretty darn flat, a corridor stretching from Minnesota to Missouri has been quietly building in the life sciences space. And the Pacific Northwest continues to grow in opportunities across all sectors. As the world grows flatter, so does the United States.

2. The keys to venture growth in any given region remain universal. It starts with a steady source of ideas, usually bolstered by a top-flight research university. Another plus is the presence of an innovative anchor company with an entrepreneurial streak, such as Dell or Medtronic, that draws talent to the area. These companies are breeding grounds for the entrepreneurs of tomorrow. If these dynamics are present, all you need to sustain a region is a support infrastructure composed of lawyers, accountants and other business professionals ready to serve the startup community. Local government support and easy travel accessibility round out the equation.

One would think that as the market becomes flatter that business becomes more impersonal, but it is quite the contrary.

Mark Heesen, President, NVCA

3. Relationships are everything. One would think that as the market becomes flatter that business becomes more impersonal, but it is quite the contrary. Every deal deserves a strong local partner. When it comes to finding new technologies and vetting new deals, nothing beats intelligence obtained on the ground. The same holds true for nurturing portfolio companies, where there is still no substitute for face time and hands-on heavy lifting. For this reason, the presence of a reliable resource to serve as the local touchstone remains critical throughout the capital cycle. The importance of these firms headquartered in these “out-of-the-mainstream” venues to partners wishing to do business in these regions can not be overemphasized.

Each of the preceding tenets plays roles in a larger equation: that of risk. Most VCs would agree that risk is only good when it can be measured and, to a lesser extent, stabilized. This brings us back to emerging U.S. venture regions and the relative stability—in terms of policy, tax law, intellectual property protection, infrastructure, etc.—that they provide. Do current darlings like India and China offer the same? Not yet.

Of course, my purpose is not to discourage VCs from exploring this newly flattened globe of ours. Venture capital should continue to flow to wherever it can find the best opportunities. Even in a flat world, however, a mile is still a mile, time is still money, and new worlds of opportunity can still be found only a short drive, train ride or flight away.

Mark Heesen is the president of the National Venture Capital Association. He can be reached at mheesen@nvca.org.