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Reflections on the Engelbart, Moore, and McKenna Conversation: Does Location Really Matter?
Terri L. Griffith
How much does location matter? Face-to-face contact matters if you’re William Shockley and it’s your mother whom you want to see. Does face-to-face matter so much when it’s your business partners? There are arguments on all sides of this issue. The easy answer is that location matters, and the closer you are the better the partnership. Going back to research done just following World War II, even being downstairs (versus down the hall) from other veteran families was enough to change relationships.1 More recent work on innovation suggests that tacit knowledge, critical for innovation, is “sticky” and can’t travel far without losing its meaning.2
Move forward to the environment of the Silicon Valley today. Cell phones, high bandwidth networks, smart boards, video document cameras, and ubiquitous email. Still, as one author notes, “the marginal cost of transmitting knowledge, and especially tacit knowledge, rises with distance.”3 Add to this arguments that a concentration of economic activity will be followed by a concentration of labor and infrastructure,4 and you may see why even in an industry focused on electronic information, location can matter. Instead of the Internet breaking down geographical limitations, we have clusters of activity as seen in the Silicon Valley and Route 128 near Boston.
For early stage companies, and in the Silicon Valley especially, this concentration may be in large part due to the location of their venture capital investors. These quotes are from a forthcoming article on venture financing and the geography of the Internet industry from 1994 to 2000: “If I can’t drive there within an hour, I don’t make the investment.” “People literally can meet someone at a moment’s notice and when you’re trying to get an hour’s worth of a venture capitalist’s time... you’re just more likely to meet with a [local] venture capitalist just because it’s more convenient for you to drive down 280 than for you to hop on an airplane.”5 IPO.com’s glossary has this entry under Geography: “refers to a simple fact: companies that are conveniently located to their market and to an investor’s headquarters are more likely to get funded than those that are not.”
News reports of the on-line job market company Elance (elance.com) note that the founders took a trip from their New Jersey apartment offices to Silicon Valley and came back with about $12 million in funding and an understanding that they needed to move west. One founder said, “the venture capitalists suggested it and we wanted to do it anyway,”6 and another, “the investors like Internet startups to cluster in the region.”7 Ironic given that the Elance business model focuses on virtually linking “elancers” (electronic freelancers) and projects from around the world.
There are reasons that venture capital firms want their portfolio companies to be local. Venture capital firms provide more than money; they provide knowledge of the field, of the market, and of the “players.” The oft-mentioned Rolodex is a metaphor for entrée to needed resources, and these contacts are developed, as one venture capitalist put it, around town and on the tennis courts. This seems clearly to be an example of the “sticky” knowledge that is supposed to be difficult to transmit electronically.
There seems to be significant support for the basic premise that you need to be where everyone else is. However, there are three tensions that work against this. The first is the basic issue of workforce availability. While it’s true that economic activity helps to concentrate the workforce, eventually you run into barriers. In the recent boom period of the Silicon Valley, the workforce gap was found to be around 35 percent, and this gap between needed and available candidates resulted in incremental costs of three to four billion dollars annually.8
The second tension is that group or innovation success relies in part on informational diversity.9 If organizations or networks are drawn from similar populations, then they are reducing their diversity and possibly their long-term innovative capability. There are benefits to networking diverse companies and cultures and yet clustering industries works against this.
The third tension is that some good prospect firms may simply not want to move to Silicon Valley, especially if the founder’s mom lives in South Dakota instead of Palo Alto.
Some firms are keeping much of their original staff where they are––and their venture capital investors are supportive of this plan. Even though BrightPlanet has reached the stage of having revenue-paying customers, its technical development staff is staying in South Dakota. That said, their new CEO Bill Shelander is located in the Silicon Valley, as will be other members of the team involved in enterprise development––the part of the action that needs the local network. Sensei Partners (BrightPlanet’s lead investor) is supportive of this approach that may “lead to lower turnover and certainly lower costs.”10
With effort, connections can be made across large distances. On February 1, 2002 the government of Alberta announced “Venture Channel” to connect Alberta to Silicon Valley expertise and investment. The program is structured such that the firms will remain in Alberta. Firms must have a round of investment from Alberta before they can gain membership in the Venture Channel.
The importance of location is jointly determined by social and technical factors. Virtual work, both within and across organizational boundaries, is on the rise. We can work with people who are not down the hall. People and organizations are capable of overcoming immense barriers when the need arises. For most early stage firms being in the Silicon Valley or on Route 128 may be critical, but it should not be seen as an absolute requirement for success. Work methods, costs, and technology can be traded-off against distance from your business partners. What’s your return on location?
1 Leon Festinger, Stanley Schacter, and Kurt Back. Social Pressures in Informal Groups: A Study of Human Factors in Housing (New York: Harper, 1950).
2 Eric Von Hipple. “Sticky Information and the Locus of Problem Solving: Implications for Innovation” Management Science, 40 (1994), 429-439.
3 David B. Audretsch. “Agglomeration and the Location of Innovative Activity.” Oxford Review of Economic Policy, 142 (1998), 18-29.
to Transactive Memory.” Research in Organizational Behavior, vol. 23, Barry M. Shaw and Robert I. Sutton, eds. (Stamford, CT: JAI Press, 2001), 379421.
4 Matthew A. Zook. “Grounded Capital: Venture Financing and the Geography of the Internet Industry, 1994-2000.” Journal of Economic Geography, 2 (2002, forthcoming).
6 Lisa Bransten. “Elance Entrepreneurs Pack Bags to Seek Gold in Silicon Valley,” Wall Street Journal, November 29, 1999.
7 Martha Mendoza. “Internet Startup Leaves its New Jersey Nest, Heads West.” Oregonian, December 6, 1999.
8 Joint Venture: Silicon Valley Network. Workforce Study: An Analysis of the Workforce Gap in Silicon Valley (1999).
9 Reviewed in Terri L. Griffith and Margaret A. Neale. “Information Processing in Traditional, Hybrid, and Virtual Teams: From Nascent Knowledge to Transactive Memory.” Research in Organizational Behavior, vol. 23, Barry M. Shaw and Robert I. Sutton, eds. (Stamford, CT: JAI Press, 2001), 379- 421.
10 Patrick J. Yam, Executive Founding Sensei, Sensei Partners LLC. Personal conversation, February 2, 2002.