The Network IS the Economy
“I rarely end up where I was intending to go, but
often I end up somewhere that I needed to be.”
- Douglas Adams (quoted in Six Degrees: The Science of a Connected Age)
Kenneth J. Martin
New Mexico State University
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 1
“The most crucial aspect of Silicon
Valley is its networks. There is no
proposition so universally agreed
upon and so little studied.”
Castilla, Hwang, Granovetter, and Granovetter
“Social Networks in Silicon Valley”
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 2
Organizing a Network
• Embedded Ties
– Trust
– Fine-grained
information transfer
– Joint problem solving
arrangements
– Problem: Lack of
information flow from
OUTSIDE the network
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 3
Organizing a Network
• Embedded Ties
• Arm’s Length Transactions
– Trust
– Fine-grained
information transfer
– Joint problem solving
arrangements
– Problem: Lack of
information flow from
OUTSIDE the network
Prepared for Coronado Ventures Forum, January 20, 2005
– Reduced “cost”
– Diverse information
– Problem: Lack of leveraging
of social capital
Slide 4
Network Complementarity
Source: Brian Uzzi, Embeddedness in the Making of Financial Capital: How Social Relations and
Networks Benefit Firms Seeking Financing
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 5
What network factors matter for
organizational innovation?
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 6
What network factors matter for
organizational innovation?
• Internal networks
– Size:
• Larger networks yield
more innovations
– Denseness:
• Dense networks yield
more innovations
Source: Valdis Krebs, Building Sustainable Communities
Through Network Building
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 7
What network factors matter for
organizational innovation?
• Internal networks
• External networks
– Size:
– Size:
• Larger networks yield
more innovations
– Denseness:
• Smaller networks yield
more innovations
– Strength:
• Dense networks yield
more innovations
• Stronger ties result in
more innovations
Source: Valdis Krebs, Building Sustainable Communities
Through Network Building
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 8
How do direct vs. indirect ties influence
venture investment decisions?
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 9
How do direct vs. indirect ties influence
venture investment decisions?
• 136 seed-stage VCs
– Average 17 years
experience
– Average 12 prior seedstage investments
– Average investment size:
$949,317
• 66 angel investors
– Average 13 years
experience
– Average 13 prior seedstage investments
– Average investment size:
$362,550
Group 1: Most recent investment evaluated and made
Group 2: Most recent investment evaluated NOT made
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 10
Direct vs. Indirect Network Ties and
VC Investment Decisions
Direct Tie?
Indirect Tie?
Investor
Mutual
Relationship
Entrepreneur
Investor
Entrepreneur
• Entrepreneur’s reputation?
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 11
Does “who you know” matter for VC
investment performance?
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 12
Does “who you know” matter for VC
investment performance?
• Thomson Financial Venture Economics
–
–
–
–
–
1980 – 1999 vintage years
3,469 VC funds
1,974 VC firms
47,705 investment rounds
16,315 portfolio companies
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 13
Does “who you know” matter for VC
investment performance?
• Thomson Financial Venture Economics
–
–
–
–
–
1980 – 1999 vintage years
3,469 VC funds
1,974 VC firms
47,705 investment rounds
16,315 portfolio companies
• Performance measure
– Successful exit via IPO or M&A as of Nov. 2003
– Average exit rate: 34%
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 14
Does “who you know” matter for VC
investment performance?
• Measures of VC
network centrality
– Degree
– Betweenness
– Closeness
Source: Valdis Krebs, http://www.orgnet.com
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 15
Does “who you know” matter for VC
investment performance?
• Measures of VC
network centrality
– Degree
– Betweenness
– Closeness
• Bottom line: Who
you know DOES
matter for VC
performance
Source: Valdis Krebs, http://www.orgnet.com
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 16
What are the differences in VC network
structure in:
Silicon Valley?
Prepared for Coronado Ventures Forum, January 20, 2005
Route 128?
Slide 17
Impact of VC network structure on
regional economic development
Silicon Valley
Route 128
Source: Emilio Castilla, “Networks of Venture Capital Firms in Silicon Valley”
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 18
Summary
• Social networks matter because trust, information, action, and
cooperation all operate through social relations.
• For entrepreneurs:
– Tradeoffs exist between embedded ties and arm’s length ties
– Smaller, stronger external ties are important for organizational innovation
• For investors:
– Larger networks maximize possible number of indirect ties
– Being connected to other well-connected VCs matters for performance
• For a region:
– Social network structure can explain growth and development of a region
– Densely connected entrepreneurial and VC networks lead to more success
Prepared for Coronado Ventures Forum, January 20, 2005
Slide 19