By Constance Gamache (Research Lead) and Madison Hofert (Undergraduate Researcher)
Samila and Sorensen’s 2017 paper Community and Capital in Entrepreneurship and Economic Growth explores the relationship between local social dynamics and investment performance, adding richness to the discussion of diversity and inclusion in VC. They went further than just saying VC investments boost the local economy, or simply analyzing the relationship of investment performance to the identities of the founders or the funders. In this paper, VC investments are contextualized within the economic development of an entire community. Samila and Sorensen ask, how does the social structure within a community (i.e. its diversity) affect its economic development (i.e. the efficient allocation of VC funds)?
The results? More integrated communities benefit comparatively more from venture capital across multiple metrics, including the quantity and quality of new patents, jobs, and companies. The authors give us three reasons for this relationship between the diversity of a community and its response to VC:
- Diversity dramatically expands a community’s capacity for innovation, and hence the supply of potential ideas for investment. Demographic diversity also increases the nature of interactions: the whole community works harder to learn more from each other, ultimately creating more collective knowledge.
- Resource mobilization: more interconnected communities have shorter average path lengths between any two people; an entrepreneur has a greater ability to employ social connections to access funding or other needed resources. Since high-potential entrepreneurs and profitable ideas exist across all social groups, and, in general, people have tighter connections to others of their own ethnicities, the close-ness of a community overall determines the extent of resource mobilization.
- Information spread: seeing the success of a diverse group of entrepreneurs encourages others to participate as well.
- A company as a microcosm for a connected community: Rather than trying to quantify social relationships, this paper examined the potential for a social relationship. If a company/VC firm is full of that potential, then the ball is set rolling for greater community connection within the workplace, and all of the benefits described above.
- Efficiency vs. Innovation: Diversity may increase friction or conflict, but that ultimately only affects efficiency, which is superseded by the benefits to innovation.
- Global Clusters of Innovation: LESSONS FROM SILICON VALLEY, by Jerome S. Engel, for the University of California Berkeley, 2015
- ‘Is It Entrepreneurship, or Is It Survival?’: Gender, Community, and Innovation in Boston’s Black Immigrant Micro-Enterprise Spaces, by Ping-Ann Addo for the University of Massachusetts Boston, 2017
*Denotes key source