Measuring Innovation: Venture Capital

Innovation is a tricky topic for economic development. Understanding why innovation is critical for economic development can be challenging, and figuring out how to communicate your region's competitive advantage can be even more daunting. So we're going to devote the next few blog entries here to the topic of measuring innovation. First up: venture capital.

With the possible exception of Silicon Valley, nearly every region in the U.S. when surveyed about business conditions will report access to capital as a challenge for economic development. While venture capital is, of course, not the only source of funding available to entrepreneurs, it's the one that seems to capture the lion's share of public awareness. This is important to economic developers for two main reasons: (1) venture capital activity is tracked by media in most major markets and serves as an indicator of a region's economic performance; and (2) many analysts use venture capital as a proxy for assessing a region's capacity for innovation. In other words, money flows to regions where interesting things are happening.

Knowing whether venture capital activity is increasing or decreasing in your region is a good start, but there is much more data available to economic developers who are interested in digging deeper. For example, the chart below shows recent venture capital investment in some of Austin-Round Rock's major industry sectors. Data is also available on which VC firms are investing in your region and which companies in your region are attracting funding. Funding by stage (Series A, B, etc.) is also available.

(Click on the chart for a larger version)


Source: Decision Data Resources

Economic developers can use this data in a variety of ways:

1. Evaluate whether or not access to capital is a potential barrier to economic development in your region. (But remember that VC is not the entire ballgame)
2. Identify emerging industries in your region. Venture capital firms will likely find emerging opportunities before you will. Continually revisit your targeted industries--are you adapting your strategy to account for tomorrow's economy?
3. Identify and reach out to companies attracting venture capital investment. Understand why they've been successful. Make them part of your story about why your region is a leading place for innovation-based economic development.
4. Identify which venture capital firms have invested in your region. Are they local, based somewhere else in the U.S., or abroad? Which industries are they targeting? Where are the financing gaps? Don't overlook VC firms in your marketing efforts.
5. Measure, benchmark, and take action. Venture capital data is available for most regions in the U.S. Compare VC activity in your region to VC activity in peer regions for a look at how you stack up to your competitors.

Next up: patents.

Brian Kelsey