Venture Capital is just the Start to Regional Equality

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A recent article in recode, entitled What this Silicon Valley VC learned on the Rust Belt Safari, reviewed a bus trip of VC’s and members of Congress to Heartland cities poised for a tech-led comeback. The members of Congress were Tim Ryan, D-Ohio and Ro Khanna, D-California. The trip was bi-partisan and in the spirit of Steve Case’s Rise of the Rest tour.

The author, Roy Bahat, identifies two reasons why it is important to capitalize on opportunities in second and third-tier cities. The first deals with the types of problems that are solved. In smaller cities: ‘Problems to solve … are more representative of the American (and, possibly, global) markets.”

Capitalizing on small city opportunity is important for a second reason. We currently don’t efficiently finance opportunities with ‘middle-term’ risk or opportunities that don’t scale as quickly as the ‘Unicorn’ tech startup.

Silicon Valley is structured well to solve problems and develop business models when a startup might grow from three to three-thousand employees in three years. Not all businesses need that speed of scale. Businesses in second and third-tier cities might grow from three to three hundred employees in three years. However, their business model might solve a real challenge that Americans face or open access to opportunities for middle America.

There is no doubt that the geographic deployment of venture capital is shocking. Numerous articles profile this disparity (see here and here). Even more so is the disparity between large and small tier metros. It is not surprising to see some metros with $3-$4 USD percapita of VC investment compared to $3,000-$4,000 of USD per capita on the West Coast.

VC activity is only the start of the conversation around regional equality.

Regional Inequality and the Local

The current debate about regional equality is centered on the metro by metro comparisons of economic indicators. Within regions, there is another form of spatial inequality along the urban-rural or urban-suburban divide. We can look from the ‘top-down’ at the metro level problems to apply Federal-level policies to stimulate growth. We can also look at what metros can do from the bottom-up to build economies that support growth.

How do we increase deal flow locally? What are the business support services available to startups in a local economy? Is there a cluster of talent or expertise in a specific industry? How do we source deals?

There are a host of other resources needed to build infrastructure and services in smaller cities across the U.S. We already know that infrastructure re-investment is significantly higher than larger metros than smaller regions. We may also find that ancillary economic development resources are also unequally distributed among larger and smaller regions.

We can also identify structural issues with how local Governments operate that could impose challenges on economic growth. In the U.S., suburban sprawl that disconnects the creative labor force and adds expense to Government services is an issue that some regions face.

The United States saw numerous ‘companytowns’ forms as small boroughs or townships. The company has since left, but the municipality still operates to serve a declining employment base and economy.  

When comparing resource allocation to large and small metros, we may find small metros are under-resourced in a variety of different ways that may include infrastructure investment, economic development resources, and the cost of operational inefficiencies with maintaining small municipalities.

The Specialization of the City

The Rise of the Rest Tour, ‘Safaris,’ or other tours where Coastal Elitesdescend into the jungles of American blight are responding to decentralizing forces in the American economy. We can foresee numerous changes that will facilitate this decentralization such as autonomous and electric vehicles, remote work, and ‘cross-border’ investing. To remain relevant coastal resources must look at the opportunity in smaller cities.

However, there is a collective opportunity in revitalizing our second and third-tier cities. As companies or remote workers seek nomadic living conditions, towns are forced to evaluate their being in the world. What unique amenities can they offer? Do they have enough resources on a per capita basis to compete with larger metros? How can they stand out in a world economy?

With higher technology, we can imagine cities as living laboratories for early-stage deployment of new technology. But the opportunity isn’t solely in high tech. Smaller cities might contribute tech that opens doors for working class access to a better quality of life. The opportunity is abundant, but only with the diligent leadership of second and third-tier cities.

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