When venture capital comes to town: Local ecosystem effects beyond funded ventures

When venture capital (VC) investment flows into a local economy, does it yield economic activity beyond the receiving ventures? While a large literature studies the effect of VC investments on venture-level activity, its consequences for broader economic activity are less well understood. We study the effect of VC investment flows on destination county employment, wages, and venture creation, using a novel instrument based on the ‘social connectedness’ of counties to major non-local sources of VC investment. Using detailed data on investor-to-venture VC flows, we find substantial positive effects: using instrumental-variable estimates, each million dollars invested into a county yields approximately one new venture, 41 jobs, and seven million dollars in payroll. We also document positive spillovers across industries, particularly toward those supplying VC-backed ventures—thereby contributing to the resource munificence of the local economy and its entrepreneurial ecosystem. • We study effects of VC flows across the US on destination-county economic activity. • We combine FE with a novel IV: social connectedness to major non-local sources of VC. • Each million $ invested yields at least 1 venture, 41 jobs, and 7 mln $ in payroll. • Effects spread beyond VC-receiving ventures to other industries through spillovers. • Supplier services benefit, helping to grow the local entrepreneurial ecosystem.