Agglomeration in the news

Agglomeration economies come in many flavors. In Forbes (Oct 30), columnist John W. Rogers Jr. writes about "Home Court Advantage". He cites an academic paper that confirms that investors do best if they invest in companies that are close to home (within 62 miles).

"Since my days as a hot dog vendor at Chicago's Comiskey Park through my years on Princeton's basketball team, I have always been fascinated by the theory of the home team's advantage. Many studies have found that athletic teams tend to win more home games than away games. For the Big Ten Conference in men's basketball last year, home teams won 70% of the games.

"Why? The home team has a certain confidence. It knows the feel of the court and the give of the rims. And, of course, the fans are on its side.

"Similarly, the home court can make a big difference to an investor. Living in Chicago gives me an informational advantage with businesses headquartered here because I encounter them all the time. I buy their products, cross paths with their executives and employees, and talk to their customers and competitors.

"There's academic support for my beliefs about the home advantage. Tobias J. Moskowitz, a finance professor at the University of Chicago's business school, has conducted extensive research on the geography of investing. His conclusion: One way to beat an investment benchmark over the long haul is to buy stocks close by--which he defines as businesses headquartered within 62 miles.

"Managers' home-area portfolio holdings outperform their faraway holdings by 2.7 percentage points per year. Let me explain just what is meant by that. Of course Moskowitz is not claiming that each town's corporations beat the national average. Rather, he's saying that a money manager has a superior ability to sort good companies from bad when the companies in question are nearby. Those stock pickers with strong convictions about neighboring businesses do particularly well. According to Moskowitz's research, which spanned 1975 through 1994, money managers who committed 20% or more of their assets to proximate companies' stocks did four full percentage points a year better with them than with the rest of their portfolios."

Likewise, the NY Times recently ran "It's not the people you know. It's where you are."

"If you have a brilliant idea for the New New Thing and want Sequoia to provide its funds and blessing — using the same golden touch provided not long ago to Google’s founders — you would be much better off in Beijing, where Sequoia has an office, than in Boston, where it does not.

"It’s convenient for venture capitalists to have entrepreneurs close by, but the reverse is true, too, said Allen Morgan, a managing director of the Mayfield Fund, which manages $2.3 billion in venture capital and is also on Sand Hill Road. Mr. Morgan made the case by pointing out that a prospective entrepreneur would, on average, need to have three to eight meetings with a venture fund before he or she was successful, but would have to go through a similar process with 5 to 10 firms before finding the one that approved the funding request.

"Even if the process goes smoothly and requires only 15 meetings — the fewest possible, given the lowest range of possibilities — and even if most of those meetings are set up in advance, the time consumed in getting to Sand Hill Road, even using local highways, can be significant. The problem is that much worse when, as often happens, a meeting is called with just an hour or two of notice. 'If you live in Santa Clara, it’s doable,' Mr. Morgan said. 'If you live in Dubuque, it’s not.'

"Entrepreneurs who live in Silicon Valley also find the technical talent they need faster than they can in any other place; they pay more for that talent, but speed is the sine qua non for success. Seth J. Sternberg, the chief executive of Meebo, an instant-messaging company in Palo Alto that is backed by Sequoia, described Silicon Valley with the fervent appreciation of a recent transplant from New York, where he had suffered three separate bad experiences with start-ups, none of which had attracted venture funding.

"The ecosystem in Silicon Valley, Mr. Sternberg said, includes “incredible techies, who live here because this is the epicenter, where they can find the most interesting projects to work on.” The ecosystem also includes real estate agents, accountants, head hunters and lawyers who understand an entrepreneur’s situation — that is, emptied bank accounts and maxed-out credit cards."