Prepared for Coronado Ventures Forum, January 20, 2005 Slide 1 The Network IS the Economy Kenneth J. Martin New Mexico State University “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)

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 2 “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 3 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 4 Organizing a Network Embedded Ties –Trust –Fine-grained information transfer –Joint problem solving arrangements –Problem: Lack of information flow from OUTSIDE the network Arm’s Length Transactions –Reduced “cost” –Diverse information –Problem: Lack of leveraging of social capital

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 5 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 6 What network factors matter for organizational innovation?

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 7 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 8 What network factors matter for organizational innovation? Internal networks –Size: Larger networks yield more innovations –Denseness: Dense networks yield more innovations External networks –Size: Smaller networks yield more innovations –Strength: Stronger ties result in more innovations Source: Valdis Krebs, Building Sustainable Communities Through Network Building

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 9 How do direct vs. indirect ties influence venture investment decisions?

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 10 How do direct vs. indirect ties influence venture investment decisions? 136 seed-stage VCs –Average 17 years experience –Average 12 prior seed- stage investments –Average investment size: $949, angel investors –Average 13 years experience –Average 13 prior seed- stage 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 11 Direct vs. Indirect Network Ties and VC Investment Decisions Entrepreneur’s reputation? Mutual Relationship EntrepreneurInvestor Entrepreneur Direct Tie? Indirect Tie?

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 12 Does “who you know” matter for VC investment performance?

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

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 14 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 –Average exit rate: 34%

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 Source: Valdis Krebs,

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 16 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,

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 17 What are the differences in VC network structure in: Silicon Valley? Route 128?

Prepared for Coronado Ventures Forum, January 20, 2005 Slide 18 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 19 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