Why Venture Capital Avoids your Startup Ecosystem

Thousands of investors and founders revealed the 10 real reasons venture capital avoids your region (it's not what you think, and it's not about the money)

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Working with cities throughout the world, developing startup ecosystems, every one of them echos the same in their effort to encourage entrepreneurship, “we’re focused on bringing investors to the table.”

What they’re doing is typical, ironically, of founders, who hear a problem and the focus on the solution (which by the way founders, is wrong). They hear startups and entrepreneurs in their city frustrate by a lack of capital and so they set out to fix that by bringing capital to market. Why this, and Problem / Solution oriented founders, are wrong is what I call the problem within the problem.

Economic development offices across America continue to treat venture capital like it’s some magical unicorn that blesses your startup ecosystem with wealth and talent. News flash: it doesn’t work like that. Capital doesn’t build the ecosystem. Capital follows it.

Let’s repeat that for the folks in the back: Venture capital follows opportunity — it does not create it.

For decades, cities and states have tried to lure VCs and angels into town with slick branding campaigns, tax breaks, or “innovation districts” that are just underutilized office parks with espresso machines. Meanwhile, most never stop to ask the one damn question that matters: Why isn’t capital here already? Until we confront that question honestly, we will keep making the same costly, ineffective mistakes.

To answer that, I asked; about 5,000 survey respondents, “What do you think is the real reason for a lack of startup funding in your region?”

Venture Capital Is a Symptom, not a Catalyst

The idea that bringing in more capital creates innovation is as backwards as thinking that installing more traffic lights will cause more cars to appear. Research consistently shows that venture capital tends to concentrate in places that have already demonstrated high-quality deal flow, human capital, and infrastructure, not the other way around.

For example, Josh Lerner and Ramana Nanda’s landmark study, “Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn.” (Journal of Economic Perspectives vol. 34, no. 3, Summer 2020) confirmed that ‘while capital can initiate some activity, long-term success depends on a preexisting culture of entrepreneurship, skilled labor, and institutions that support high-growth firms.’ The Kauffman Foundation — perhaps the single most respected body on entrepreneurship research — notes more bluntly: Capital is the last thing to show up.

And according to data from the National Bureau of Economic Research, while government-sponsored VC funds can stimulate local investment in the short term, they often underperform compared to private capital, and worse, tend to invest in less innovative startups when not matched with experienced ecosystem leaders.

This is not an issue of capital shortage! Capital is abundant but often directionless, or risk averse, or ignorant (frankly). It’s just not choosing your city. So… why not?

Let’s Ask Everyone

I did. Over the last few months, we conducted a national survey of venture investors, family offices, and founders. Thousands of responses. One question: What’s holding back venture capital your own backyard? The results are sobering but deeply clarifying.

Let’s unpack this, layer by layer, like a bureaucratic onion.

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1. Risk Aversion (23%)

This is the polite way of saying: Your startups aren’t worth the gamble. It doesn’t mean investors are timid, it means your deal flow is unconvincing. Venture capital is inherently risky; if investors are still avoiding your region, it’s not them, it’s you.

And yet… why are investors so risk-averse? Likely because your ecosystem has no track record of returns. No M&A activity. No unicorns. No exits. That suggests a lack of experience, support, or policy infrastructure to de-risk early-stage ventures. Fix that first.

Here’s how we systemically de-risk the entire game

2. Limited Network Connections (21%)

Translation: Nobody knows anybody. Investors are relationship-driven. If you don’t have well-connected general partners, advisors, mentors, and second-time founders, capital isn’t going to flow.

But again, ask why: Is this because your community lacks social capital? Because universities and corporates aren’t integrated into the founder pipeline? Because local press and reporters don’t know how to capably cover the startup sector? Because your chamber of commerce thinks “venture” means hosting another speaker series? Networks don’t magically appear. They have to be intentionally designed and incentivized.

What most lack are online, active community groups – this was a catalyst of Austin, TX

3. Lack of Startup Quality (15%)

Ouch. But honest. If what you’re building isn’t disruptive, market-led, or even viable, VCs won’t touch it. Want to attract capital? Build better startups.

This is a direct reflection of education, mentorship, and resources. Ask: Why aren’t quality startups being formed? Is it the fault of startup development organization pipelines? Are founders being misled by bad startup advice? Or are local economic development strategies treating all businesses the same?

Spoiler alert: Startups are NOT small businesses

4. Lack of Investor Awareness (12%)

If a startup raises in the forest and no one hears it, did it really happen?

Investors can’t invest in what they don’t know exists. This is a marketing problem. A media problem. A policy problem. And a public affairs problem. Where’s your deal newsletter? Where’s your local angel syndicate doing demo days? Where’s your economic development board helping highlight early-stage wins?

Notice, very related to issue number 2 so let’s appreciate that we can tackle a couple of these problems in one fell swoop (If you know what you’re doing). Awareness is built, not assumed. And too often, local governments sit back expecting VCs to come find them.

Notice too though, reasons 1, 2, and 3, are agreed upon by 59% of respondents, to be the primary cause! Why are your demo days failing to fix this one? Because you didn’t address the top 3!

5. Poor Infrastructure (10%)

We’re not just talking about broadband and mobility (although those matter). Infrastructure means predictable governance, IP protection, affordability in both mobility and physical space, tech-enabled services, and efficient permitting.

Truly, if you keep encouraging all the startup meetups to be in the most expensive part of town, because it looks good to your constituents, you’re clearly not genuine in your intention to serve entrepreneurs.

6. Regulatory or Policy Barriers (6%)

Six percent may sound small, until you realize that policy is the lever that moves all others. If taxes are punitive, if equity incentives are unclear, if nonprofit venture funds can’t legally invest in startups, if you hire the wrong kind of people because you fund workforce and corporate development while pretending they serve startups, you’ve got systemic rot that no amount of cheerleading can solve.

Here’s what public choice economics tells us: policy shapes markets more than product.

If a startup can’t be assured of opportunity because of your confusing regulation about IP, they’re not going to scale.

By the way, public choice economics is the application of economic principles and methods to the study of political science and government decision-making. It assumes that individuals, including voters, politicians, and bureaucrats, are primarily motivated by self-interest, just like in the private marketplace.

7. Cultural Factors (6%)

This is your “good ol’ boys club” problem. Or your “we only back B2B SaaS” problem. Or your “our city doesn’t fail gracefully” problem. If your local culture punishes risk, mocks failure, or prioritizes conformity, then congrats, you’ve built an economy optimized for mediocrity.

When I moved to Austin, there were some local startup icons who repeatedly said, “we don’t do consumer here,” when what they should have been saying is, “I don’t have a clue.”

Startups thrive where failure is normal, and success is exponential. That takes cultural courage. I’d bet, having worked with nearly a hundred cities, your culture sucks.

8. Market Limitations (4%)

Sometimes your town just isn’t big enough, isn’t diverse enough, or isn’t accessible enough to support scalable ventures. That doesn’t mean you can’t be a startup hub, it means you need to focus on certain verticals or connect better to other regions.

This is where a strategic cluster approach matters. What I will forever find amusing is that in the research published frequently by PitchBook, Kauffman, and even Government entities, they compare “Silicon Valley” performance to distinct cities – and I can’t help but rant a bit in reply: Silicon Valley is 3 major cities with most of the venture capital 45 minutes outside of San Francisco! Media perpetuates ignorance about your market but that just makes it all the more important that you step it up and communicate both regional distinction and opportunity beyond Our City.

Become the “Topeka of agtech” or get beyond Bentonville because of Fayetteville, or even Tulsa!

9. Economic Constraints (2%)

This is almost never the actual problem, because capital is abundant and the entire point of venture capital is sophisticated investing in risk (which means, to borrow from Wall Street wisdom, buying in a down market). But it might indicate local family offices are tied up in real estate. Or that banks are risk-averse. Ask why, and you’ll probably uncover regulatory or incentive design flaws.

10. Available Alternatives Crowding Out (2%)

When grants, tax credits, or government funds are abundant, they can crowd out private capital by removing the incentive to invest. This is the cruel irony of most economic development programs. If you subsidize everything, investors don’t bother competing.

You’ve created a charity, not a market.

This is why, by the way, Europe languishes: prolifically available public funding

Here it is again

Ask Why. Then Ask Why Again. And Then Ask Why That Is Still True.

This is first principles thinking. Don’t stop at “risk aversion.” Ask why investors are averse. Then ask why that reality hasn’t changed. And then again, why not? That’s where you need to be.

In doing so, you might uncover that your university tech transfer office has never once helped a founder. Or that your workforce programs don’t differentiate between startups and restaurants. Or that your metro’s media never once covers a Series A win unless it’s in real estate.

These root causes are fixable. But only if you start digging.

What Actually Works: A Playbook for Economic Developers

Economic development leaders must stop chasing capital. That dog won’t hunt. Instead, focus on:

• Startup Development Organizations that serve founders for free and aren’t real estate plays

• Public policy frameworks that define startups distinctly from small businesses

• Incentive reform that stops rewarding stagnation and starts rewarding disruption

• Marketing and media that elevate local deal flow, not just ribbon cuttings

• Technical infrastructure like broadband, IP law access, and civic tech platforms

• Founders who actually understand the market, not just a pitch deck

We’ve covered how these structures evolve, how coworking spaces, incubators, and accelerators need to be rethought, and how venture studios and public affairs offices can work in tandem to build something real.

Why Cities Fail to Attract Venture Capital and What Ecosystem Developers Must Fix

Be clear: cities, states, and even national governments, make one of the most expensive, damaging mistakes possible when they try to attract capital rather than build the conditions that capital finds irresistible.

This is why it is vital to work with ecosystem developers and policy strategists who actually understand startups. Workforce development programs that focus on welders and corporate site selectors aren’t going to help a B2B AI SaaS startup in Round Rock raise a Seed round. And pointedly, evident in the survey I’ve pushed on thousands, your having venture capital available doesn’t change anything when the problems are underlying.

Need help with this? Touch base

If your economic development agenda doesn’t distinguish between startups and small businesses, you’re not building an ecosystem, you’re misallocating public funds and wasting everyone’s time.

Think you’re building a startup hub?
Then stop asking how to attract capital. It’s there. Ask why it isn’t showing up as venture capital.
Then dig until you hit bedrock.

And then, reach out, not to capital, but to the people who understand what makes it move. Because until your city gets that right, venture capital will keep following opportunity, just not yours.

Ready? Send this to your team.