Lack of Tech, Innovation Correlates with Lack of VC Investment

new-knowledge-worker

As Hawaii continues to grow its nascent startup ecosystem, a recent study published in The Atlantic shows that there may be more to an ecosystem’s success than just launching a few accelerators, creating a few groups, and hoping for the best. A study by The Martin Prosperity Group shows a high correlation (which isn’t necessarily causality) between venture capital investments and innovation, a thriving tech industry, and education levels–three areas where Hawaii falls short.

Here’s a quick rundown of the attributes highly-correlated with VC investment volume and dollars, along with Hawaii’s (or Honolulu’s) ranking within the U.S. (If you need a primer on statistics, click here.)

Attribute   Cor to Investment #   Cor to Investment $    Hawaii’s Rank 
Patents per Capita .51 .43 49th
High Tech Companies .77 .70 Not in top 50
Metro Incomes .56 .50 8th
College Grads .55 .50 30th
Knowledge Workers .57 .50 Low?

Other than income level, which can potentially be considered an anomaly due to Hawaii’s high cost of living (which is ranked #2 after New York City), our area ranks fairly low on the attributes that show a correlation with venture capital investments. And, while it can only be a good thing to have State investments in our local startups, it might not be the best approach.

Instead, this study leads one to deduce that, if the State wants to encourage startups and draw venture capital funds, it should take a long-term approach and focus on influencing innovative, tech-focused, and knowledge-based companies to relocate to Hawaii, which would expand and diversify the workforce, bring more innovation-building companies and workers, and combat any brain drain by giving college grads a reason to come, stay, or return.

Related to the numbers above, here are some key observations:

  • Venture investment is significantly associated with both levels of innovation and a high-tech industry. These are things that Hawaii sorely lacks, especially when new startups need advice, guidance, and talent. The author states that, “this is squarely in line with studies that have found that venture capital investment is attracted to areas with large clusters of high-tech industries and high levels of innovation.” We have neither.
  • Venture investment is more likely in affluent cities, but the author’s “hunch is this relationship goes both ways, and also reflects the greater concentration of high-tech industry in venture capital metros.” Sure, Hawaii has high income levels and lots of rich residents, but that wealth rarely relates to–or invests in–tech, startups, or innovation.
  • Venture investment is correlated with the percentage of college grads and the percentage of “knowledge-work jobs” (science and technology, arts, media and entertainment). Honolulu is the 30th ranked metro area in per-capita college grads, but the focus of those workers is, in my guess, rarely applied to the types of tech and innovation that investors seek (comp sci, engineering, etc.).
  • Hawaii lacks a strong local university to crank out both the talent and the innovation in volume. “It makes intuitive sense that venture capital is drawn to talent pools in great cities and also around great research universities and college towns.”  UH-Manoa is ranked #156 of 200 ranked US universities by U.S.News & World Report, and by their own admission, only 27% of students ever graduate with a degree (top schools graduate ~75% and Hawaii as a state ranks #45 on college graduation rates). HPU is ranked #81 and Chaminade is ranked #86 of just “West Regional universities,” and only BYU-Hawaii has a respectable ranking at #17, all according to U.S.News & World Report.

More Than Tech

Another interesting finding in the research is that “venture investment is also closely associated with business and management occupations and also with arts, media and entertainment occupations. These results likely reflect the increasingly multifaceted nature of great startups as attractive venture investments.” The research goes on to correlate investment with diversity and tolerance, both of which Hawaii thrives upon.

The point here is that “management talent is crucial to the success of start-ups,” and that it takes a broad range of talent for a VC to be comfortable making an investment. And, that doesn’t just mean that the startup itself has broad talent, but that the city in which they are based has a broad, educated, experienced, smart pool of talent from which to hire from as they grow.

Conversely, the author also points out that, “While many economic developers and mayors in cities across the United States and the world have pinned their hopes on the role of so-called ‘eds and meds‘ — higher education and medical institutions — in spurring high-tech development, Mellander’s analysis finds no significant statistical association between eds and meds employment and venture capital investment across metros.”

Therefore, relying on large hospitals and the universities themselves to drive startups is a mistake.

What Does Hawaii Need?

If we were to design a plan based on this study, Hawaii needs to diversify the economy and expand the talent base by bringing in more high tech and innovation-based companies. Other cities have done well by offering tax breaks and other incentives, but they don’t face the distance issue that we face here in the middle of the Pacific Ocean.

The bottom line is that it’s not a simple issue, and it won’t be solved in one year. Or two. Or five.

Our State needs to continue funneling money into our startup sector and remain patient on seeing any ROI. Our budding startup accelerators need to continue churning out promising startups, touting them to mainland investors, and pounding the pavement for our next entrepreneurs. Our small but aggressive population of entrepreneurs and knowledge workers need to continue pushing forward and, even if they eventually relocate to the mainland to appease investors, try to keep an outpost of talent in Hawaii.