And their managers believe their experience and expertise can be useful in the later stages of an enterprise’s growth. Hence, in the private sector the multi-stage fund has evolved and the growth of private equity funds has accelerated – they look set to raise a record of almost $200bn in 2006.

Curiously, the public sector equivalents of the venture capital fund have barely begun to explore multi-stage investing. Their association notes that only 12% of them make later-stage investments, compared with 57% at the seed capital stage and 39% at the venture capital stage.


These ‘seed and venture’ funds were established in part to try to recreate the Silicon Valley phenomenon. Not seeing enough local angel and venture money in the private sector, local leaders sought to lubricate the entrepreneurial process. They believe they have succeeded in helping the birthing of young companies. However, their impact on employment has been slight and their contribution to the establishment of significant clusters remains elusive. As a cluster growth strategy, seed and venture funding may have been necessary but it has not been sufficient.

The tale is told in part by the net migration of 25-44 year olds, especially those with university degrees. According to the US census, there are only a handful of metropolitan areas where this number is net positive. Throughout the country, local leaders are wrestling with this issue. For some, a vicious cycle has taken hold: no companies in the new clusters to retain or attract talent and no talent to attract new companies to clusters.

What might be possible if public seed and venture funds emulated their private sector forebears and began to evolve into multi-stage investors? As the numbers indicate, a few have, but on closer examination this migration into the private equity stage has been limited largely to expansion of local companies.

So, there is a promising opportunity: build and sustain a strategic cluster by using equity co-investment to recruit established but growing enterprises. But, there is also a significant challenge: traditional economic development recruiting is not likely to be effective in gaining mind-share with the 3000 private equity funds that ‘own’ the promising young companies now operating beyond local borders, foreign and domestic.

Daniel Malachuk works with business and government leaders on global direct investment strategies. He has advised many of the world’s leading companies and served in the public sector as director of White House operations.