Venture Capital Avoids Your Local Ecosystem

What Your City and Government Should Be Doing

Too many city agendas still dodge the fact that capital doesn’t build startup ecosystems; it follows them. Many of my peers in economic development and city planning host investor meetups and demo days as though the challenge is connecting investors with startups. In a healthy startup ecosystem, angel investors and venture capitalists intentionally participate and are easy for founders to find so when what we’re hearing in cities, from startups, that entrepreneurs can’t raise venture capital, we must look beyond whether a venture is fundable and ask instead why venture capital is insufficiently available.

Venture capital follows opportunity; it does not create it. The OECD’s 2025 benchmarking of government VC policies reads like a polite intervention: public tools can help, but where ecosystems lack quality deal flow, experienced investors, and enabling institutions, state-led money underperforms, crowds in little, and too often misallocates risk. The U.S. remains the outlier precisely because of a venture capital market matured largely without heavy direct government control, while public R&D, IP frameworks, and institutions created the conditions for private risk to price itself.

These are practices we can explore in other countries and we’re here to help everyone do that; that is, not replicating the U.S., because every economy varies, just as nowhere else should try to be like Silicon Valley, but rather, appreciating that venture capital investment requires more than meetups and introductions.

Local and national policy (yours) must shape the conditions venture seeks: talent, IP clarity, housing and mobility that don’t repel workers, and friction-free company formation. Brookings’ July 2025 mapping of America’s AI economy makes the concentration point unavoidable: thirty metros (with San Francisco and San Jose as “superstars”) account for the lion’s share of AI job postings and capital because those places compounded talent, research, and adoption advantages over years, not because someone hosted more pitch nights.

We didn’t just opine about this. A few months ago, updated with this publication, I wrapped up a survey of thousands of investors, family offices, and founders in which I asked one question: What’s the real reason venture capital isn’t showing up where you are? This is the survey you need to share throughout your city because while you have innovation spaces in place or throwing a pitch day to investors, you’re likely neglecting what really needs to be done to make your region of the world meaningful to venture capital. In the months since I published the survey results, I’ve kept our eye on new research from Brookings, OECD, National Venture Capital Association, and more, cited throughout what I want you to read now, why venture capital isn’t showing up and what to do about it.

Venture capital is a symptom, not a catalyst

There are the survey results but before I explain that let’s catch up on the last few months with some more 3rd party evidence that we can help you work through as a city. OECD’s Financing SMEs and Entrepreneurs Scoreboard: 2025 Highlights finds SMEs face tighter credit conditions; equity fluctuates and concentrates where capable intermediaries and innovative employers already operate. Translation for economic developers: if you can’t show investors the system that consistently develops venture-backable firms, they’ll price your region like a risky experiment and move on.

When VC capacity is constrained, the places with thinner historical VC networks suffer disproportionately; fund sizes shrink, follow-on funds drop, and startup valuations fall (merely because of capital - which goes to show how reliable we can trust valuations). That’s not my snark; that’s the empirical result of a regulatory shock analyzed by Chen & Ewens (updated through 2023, widely discussed in 2025 finance circles). VC density multiplies advantages; scarcity multiplies disadvantages.

Now, the survey’s top ten, reframed since I published with recent context:

1) Risk aversion (23%)
No, investors aren’t “cowards.” They’re reacting rationally to weak deal flow and missing preconditions. PitchBook–NVCA’s quarterly continues to show dollars concentrating in hubs with repeat founders and institutional capacity. The AI surge magnified that: super-sized rounds went exactly where you’d expect. The signal for you: de-risk systems, not just individual rounds in startups: (mentorship with real operators, repeatable validation, local follow-on capital, developed programming such as what we have in Founder Institute to activate and educate entrepreneurs).

2) Limited network connections (21%)
This isn’t a “meet more people” problem; it’s a structured social capital problem. Regions that knit founders, corporate adopters, universities, and policy shaped into predictable pathways get attention. That’s why Founder Institute leans so hard on entrepreneurial personality diagnostics and discipline: it standardizes how talent is identified and developed before capital shows up while helping everyone connect beyond what’s possible at a meetup. If you’re still hoping general networking cures this challenge, you’re playing slow-pitch softball in a Formula 1 paddock. See We Already Know How to Do This.

3) Lack of startup quality (15%)
The 2025 literature is merciless: innovative activity attracts venture, not the other way around. Fehder et al. (2025) in the Journal of Financial Economics, again ties innovation inputs to subsequent VC financing, creating the flywheel that raises your entire region’s baseline. If your pipeline is full of small businesses cosplaying as startups, you are training investors to ignore your zip code. Start by distinguishing what a startup actually is (not a small business) then make sure that in place are the existing programs that manufacture testable, venture-ready hypotheses. Start here: Why It’s Critical We Distinguish Startups From New Businesses and then message me so we can work through what that looks like for you.

4) Lack of investor awareness (12%)
Awareness follows credible signals. The British Business Bank’s 2025 Tracker lays out how targeted, professionalized regional funds coupled with proactive storytelling shift attention (and catalyze private co-investment) when the pipeline is real. If your “PR” is ribbon-cuttings and one unicorn from 2016, you’re broadcasting that nothing is happening. If you are broadcasting but your news of innovation reaching only a local audience by way of local media, you’re not reaching other audiences that matter. Build a deal newsletter, run a serious angel syndicate, connect with global media, work with startup influencers to reach further, and publish frequently what’s going on there.

5) Poor infrastructure (10%)
Infrastructure in this context is policy, as well as experiences and access to resources, not just pipes, roads, and bandwidth. OECD warns that investment stagnates when uncertainty and transaction frictions persist; Brookings’ AI map functionally proxies “infrastructure” as the composite of talent, research, adoption, and corporate demand. If your founders can’t afford to live near the talent, or your permitting stifles lab buildouts, an “innovation district” is going to change things; fix the enabling environment first.

6) Regulatory or policy barriers (6%)
Small percentage, outsized impact. Here’s a great example because of not only the policy itself but what has happened since. In April 2024 the U.S. Federal Trade Commission finalized a national noncompete ban enabling a far more competitive job market wherein talent would also move around more, fueling innovation; nice, but, just this month they backed off the policy. Translation: not just good or bad policy but regulatory volatility causes chaos where venture capital favors stability. If your state or courts lock down mobility as has happened just now in the U.S., expect fewer spinoffs, slower knowledge diffusion, and more “we’ll just open in Silicon Valley.” We’re in the bottom 5 of reasons venture capital might avoid your ecosystem but appreciate that the survey asked the most significant cause - if you’re facing bad or inconsistent policy, to high risk investors, it isn’t worth the risk.

7) Cultural factors (6%)
If your civic consensus is that “we don’t do consumer” or “failure is shameful,” then you’ve optimized for mediocrity. Culture is policy with a human face. Program for repeated attempts, not one-and-done accelerators. And if your “mentors” recycle podcast wisdom or sell consulting services to the founders they purport to be helping, and worse if they don’t even have startup experience, you’re feeding founders placebo. Such experience or the right culture isn’t easy to find in your community? It’s easy enough to put what we’re doing here in place there.

8) Market limitations (4%)
You can be small and still be strategic. Let me bring us back to the UK as new insight is instructive: public vehicles like the Nations and Regions Investment Funds moved real money and deals outside London, but what actually sticks is specialization plus local fund managers tied to industry. No specialization = no stickiness. “Tech” isn’t a sector and defining yourself as “startup” doesn’t mean anything of what’s done well there; build a vertical and interlock with nearby metros in an honest regional play. Consider for example, New Mexico and Quantum.

9) Economic constraints (2%)
Capital is abundant; confidence is scarce. NVCA’s 2025 policy agenda reads like a checklist of friction points: QSBS (qualified small business stock) clarity, public-market access for small caps, SSBCI (State Small Business Credit Initiative) implementation but the throughline is the same: reduce uncertainty, improve exit channels, and LPs will underwrite more risk in more places.

By the way, have you noticed that many of these policy decisions or organizations still refer to “small business” when what they’re referring to is innovation and startup? Remember what I said: not the same thing. Pointing it out here to draw your attention to the fact that we can always improve circumstances for investors and entrepreneurs.

10) “Available alternatives” crowding out (2%)
When grants and public credits dominate, private incentives distort. One more OECD report, 2025’s comparative review of government VC is carefully worded, but the signal is there: public programs crowd in private capital when they’re professionalized, matched with experienced managers, and disciplined; they crowd out when they substitute politics for underwriting. Recent academic work on government-backed VC performance echoes the same heterogeneity: design and operator quality determine whether these funds complement or cannibalize private markets. Simplify that - what it means is that if your government is providing funding directly to ventures, what you might think of as helping is actually hurting. A fix? Allocate capital to the Startup Development Organizations or through experienced fund managers where the capital is put to work more meaningfully with those of us who work in innovation and entrepreneurship.

Ask why. Then ask why again.

I like to push economic development offices, city managers, and state governments, to apply First Principles thinking when considering the impact they’re having on entrepreneurship. First Principles is a problem-solving approach that involves breaking down complex problems into their most fundamental components, allowing for innovative solutions and clearer understanding. It’s the only way out of the spiral most of you are in where you are doing something like hosting events for investors, as logically that would help bring them into the market and connect them with startups, and yet funding is still lacking. Why? Then ask why again.

If “risk aversion” is the headline issue in your ecosystem, the subhead is missing mentors with real operating experience, universities bottlenecking tech transfer, weak local procurement for first customers, startup programs that aren’t delivering, and press that can’t tell a seed round from a Series C. Those are policy addressable. Dig until you hit bedrock.

What Your City and Government Should Be Doing

Quit chasing capital. Build what capital follows.

• Startup development organizations that are not merely real estate plays but built with structured activation, repeatable validation, and operator-led mentorship. (Founder Institute’s entire methodology exists to do this, from the Entrepreneur DNA assessment to applicant recapture because people, then process, then product.)

• Clear policy frameworks that distinguish startups from small businesses so incentives don’t subsidize the wrong thing. Start with the six-part lens here: The 6 Considerations of Startup Economic Development.

• Incentive reform that rewards disruption and early adoption, not attendance. Tie public money to programs with tested and proven methodology as well as milestones that matter for venture outcomes, not vanity metrics.

• Media and market signals that elevate deal flow over ribbon-cuttings; publish a monthly, verifiable pipeline overview.

• Technical infrastructure such as IP access, lab space, broadband, social network connectivity, affordable mobility - all lined up with your targeted verticals.

• Educate investors because investing in startups is not at all like investing in businesses. You’re doing everyone a favor by having something like VC Lab in place and more, let’s talk about educating Angel Investors.

• Venture studios over accelerators when you need concentrated company creation capacity glued to local industry, considering helping the investor operators who are spinning out innovation while investing in their own work. Underwriting such businesses enables them to accomplish more.

If you still need a comparison point, look one more time to the British Business Bank’s 2025 reports which show that persistent, specialized, regionally managed funds can shift activity outside the capital. This is not “spray and pray” subsidy; it’s that experienced operator-grade intermediation tied to sectors works while trying to be the next hot spot for startups merely puts you in an incredibly competitive place of everyone wanting to be the same. You cannot PR your way out of when the data keeps showing that venture capital isn’t showing up.

Struggling with venture capital, ask why but then ask why that isn’t working, because for most of you, what you’re doing isn’t

If your agenda doesn’t distinguish startups from small businesses, if your “ecosystem” is a schedule of events rather than a pipeline with standards, if your incentives reward occupancy instead of outcomes, you’re not building anything investors will get behind. You’re subsidizing a set piece. I wrote Why Cities Should Invest in Startups and Why Nobody Understands Startup Growth to help reframe your metrics and perspective.

Think you’re building a startup hub? Don’t ask how to “attract capital.” It’s there. Ask why it isn’t compelled to show up as venture capital for your founders and then fix those root causes with operator-grade institutions such as Founder Institute, policy clarity, and a real pipeline.

If you’re serious, stop reinventing the wheel and align with infrastructure that already works. That’s why this update to my Startup Economist study carries the Founder Institute banner; our view is simple: measure entrepreneurial capacity, activate it with discipline, and plug founders into the networks and studios that compound outcomes. Capital follows that.

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Want to test whether your ecosystem is investable, really?

Map your next 12 months to those six considerations of startup economic development and tell me where you’re weakest. I linked to them rather than featuring them in this article so here they are now:

1. A culture of competition, potential, and creativity

2. Reasonable wealth available

3. Innovative employers

4. Little – no government interference

5. Access to startup experienced people

6. Credible and distinct promotion of the city/region as such

When you email me (connect here), tell me where you’re weakest then point to a specific program, policy, or institution you own that fixes it. If you can’t name one in 30 seconds, that’s the work. Share what you’ve actually tried, especially if it failed. We’ll compare notes and get you from theater to throughput.

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If investors wouldn’t fund your ecosystem as a startup, why would they fund your startups?