Rather than dipping too deeply into the tax break tool box to attract new business, state and local governments might do just as well to make their local skies more friendly. Some research I’ve recently completed suggests that the easier it is for venture capitalists to travel by air, the better the companies in which they invest do.
When my colleagues (Shai Bernstein at Stanford University and Richard Townsend at Dartmouth College) and I analyzed what happened when new airline routes were introduced that reduced the travel time between venture capitalists and companies in which they had invested, we found a robust result: the travel time reduction leads to an increase in innovation as well as a greater likelihood of an IPO. Moreover, the greater the reduction in travel time, the stronger the positive effect on portfolio companies.
Our results indicate that VC involvement is an important determinant of innovation and success. Far from just sitting back to see if their investments pay off, venture capitalists tend to be active investors. They want to be up close and personal with their companies. Better flight connections that enable them to do so lead to greater company success, we found.
The introduction of more direct routes reduces not only the travel time, but the inconvenience of connecting flights. They are sensitive to the hassles of indirect flights, including the fear of missed connections, delays, or cancellations. Venture capitalists themselves have long noted the importance of direct flights. For example, Craig England, CEO of England & Company, an investment bank with major activities in venture capital, told the Wisconsin State Journal in 2004 that limited air service tends to discourage VC investment in Madison, WI.
“Many potential venture capital investors on the East and West coasts aren’t willing to travel anywhere that isn’t serviced by a direct flight,” he said, “and early-stage investors often like to play an active role in a company’s development, which is difficult to do from afar.”
A similar observation was made by Jim Nichols, a director at the North Carolina Department of Commerce, in 2000. “With venture capital firms particularly, they like to have companies close by so they can reach out and touch them, keep an eye on them, help them expand and grow,” he told the Knight Ridder/Tribune Business News. “North Carolina historically has been just a little bit hard to get to, and it would basically kill a whole day just in transport back and forth. With a direct flight [between San Francisco and Raleigh-Durham], you get here in five and a half hours, so you can spend at least half a day directly working with the companies and get back in reasonable time.”
Our results, which are based on a large sample of VC investments, confirm that flight connections are indeed a big deal for VCs. We found, for example, that the number of patents goes up by 3 percent and the probability of going public increases by 1 percent when VCs can get to their portfolio companies more easily. The ability of VCs to easily spend time at their portfolio companies—and hence VC involvement—pays off.
Tax incentives and subsidies can be an expensive and not always effective way to attract entrepreneurial activity to a region. Based on our research, policies that encourage new airline routes to VC hubs may be a better way to go.