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Friday, April 2, 2010

An Environment for Innovation

Entrepreneurs thrive and prosper where there are other entrepreneurs to nurture them.

And when it comes to serial entrepreneurs, entrepreneurs who have started company after company, California reigns supreme, with more entrepreneurs per square mile than any place on earth. And with those serial entrepreneurs comes venture capital. Seed money. One of those serial entrepreneurs, Sun founder Andy Bechtolsheim, put up Google's first seed money. Rumor has it that after talking to the Google founders for only a few hours, he wrote them a check for $100,000—but they couldn't deposit it immediately because they hadn't yet filed the legal papers to establish their company.

If the story is true, Bechtolsheim did more than give Page and Brin a financial start; he lent them credibility. His buying into their project sent a message to those who know that serial entrepreneurs can spot the good ideas. Having created their own companies, serial entrepreneurs know how to judge the quality of new ventures at first glance.

When evaluating new ventures for investment, serial entrepreneurs ask questions about the company like, "Does it meet the needs of users?" and "Will the money we invest be used prudently?" and "Is the economic model viable?" Their experience helps reduce the risk of financing startups and seize real opportunities quickly.

In a 2006 study titled Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs, Paul Gompers and colleagues at Harvard University calculated that "entrepreneurs who succeeded in a prior venture (i.e., started a company that went public) have a 30% chance of succeeding in their next venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding."[5] In a market fraught with high risk, this sort of expertise is invaluable.

California also offers young entrepreneurs a dense network of venture capital firms making deals. For example, according to a 2007 ranking of the top 100 early-stage venture capital firms in the United States by deals made (Top 100 Venture Capital Firms), about half of the top 100 firms are in California. Massachusetts is a distant second with about 25 percent of the total.

This concentration of venture capital firms makes finding technology funding in Mountain View, California, a lot easier than it might be to land capital in Sedona, Arizona, or southern Italy.

[5]Paul Gompers et al., "Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs," NBER Working Paper Series No. 12592, 2006.

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