The geography of the Internet industry, 1994--2000: Venture capital, Internet firms and regional development

Despite the space-transcending ability of Internet technology, the indicators developed in this dissertation show that the commercial Internet clustered in a few regions within the United States during the period from 1994 to 2000. The existence of these agglomerations runs counter to expectations that the Internet would bring the “end of geography” and provides the dependent variable for the rest of the dissertation. Using the case studies of the San Francisco Bay and New York metropolitan regions, this study argues that the use of tacit knowledge by venture capitalists provides an important explanation for this clustering.;Venture capitalists played a central role in the development of the geography of dot-com companies due to the premium that entrepreneurs placed on speed and the reliance of venture capitalists upon local institutions and networks for the creation of tacit knowledge. The emphasis on speed and efforts to capture first mover advantage made the acquisition of venture capital a strategic asset that could provide quick and competitive boosts to companies.;Although capital is often characterized as the most fungible and easily moved input to production; venture capitalists depend upon regional resources to gain access to tacit knowledge about promising industries and companies that otherwise would not be available. Once invested in a company, venture capitalists provide a number of nonmonetary inputs including the introduction of entrepreneurs to important contacts and collaborators and input on a company's strategy and tactics.;Thus, it was not the amount of capital in a region per se that was the key element behind the rapid expansion of the Internet companies, but the way in which capital was organized and made accessible to entrepreneurs. Regions with systems of early stage venture capital in place had an advantage vis-à-vis other areas because venture capitalists were among the first to recognize the commercial potential of the Internet and quickly moved to fund companies. A region's system of risk capital develops alongside regional industrialization creating a dependency on the entrepreneurial infrastructure put into place by earlier industries.