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Executive Summary

Innovation cluster theory puts great emphasis on access to capital for technology focused start-ups. Conventional wisdom assumes that this implies venture capitalists (VC’s) play the key role in providing capital in any regional economic development plan that a country or region writes to create its leading innovation cluster(s). However:

VC’s focus the vast majority of their capital on established, emerging-growth companies that are already far beyond their formation and seed phases.
This tendency is being exacerbated as ever larger amounts of VC capital are going to pre-IPO and later investments.
Conversely, the majority of US start-ups that do receive organized funding in their initial phases, receive that funding from accredited angel investors – In each of the last 3 years angels exceeded $22 billion in funding (2014 $24.1 billion, 2013 $24.8 billion, 2012 $22.9 billion).
Over the last 3 years, an average of 35% of the angel capital has gone into the Seed or earlier stage of investment or $25.1 billion over the three years compared to just 3% of VC capital.
Recently incubators and accelerators have emerged to play an important role especially in the very first formation phases of a start-up’s life cycle however, they provide only modest funding.
While equity crowdfunding may offer an additional future source of start-up funding, to date it has focused on real estate and peer to peer lending with technology start-ups representing a minority of the modest equity capital committed in the US.

The implications for US Innovation and Entrepreneurial Policy should be:

Those writing regional economic plans in the US at the national, state or local levels need to be clear that their plans will not succeed without the creation of a large and vibrant angel community in their region.
Innovation cluster strategies must, consequently, include ways to accomplish competitive advantage in attracting angels to invest in the innovation cluster.
Conversely, less is needed with regard to VC focus - the VC’s invest after companies have been made VC investable by angel investors by which time the company can raise funding outside the geography of the cluster.
US lawmakers and regulators should put more emphasis on finding ways to incentivize and motivate citizens with the potential to be angel investors to become so.
More can be done in terms of encouraging today’s angels to invest more - for example, the small business capital gain exemption could be extended and a parallel small business capital loss program could be put in place.

In conclusion, in the US and around the world growth in the economy, jobs, and human well-being are being driven by innovation and the formation of start-ups focused on bringing these innovations to market. These start-ups are being backed by angel investors - not by VC’s or by other means; regional economic development plans focused on stimulating clusters of innovation need to directly reflect this fact. Within the US, federal, state and local governments can do more to stimulate growth if they reflect on this reality and build their plans accordingly.