10 November 2020

The Game That Reveals the Common Culture That Defines the Cities That Attract the Most Venture Capital and Vote Most Democratic

One description of culture is what most people do most of the time. (And by this description you throw out the miscreants and the saints, left with your typical person.)

Cities have very different personalities or cultures. I was trying to articulate why I was so charmed by Austin, TX when a trip outside the city to the suburbs clarified it for me. I drove by a mall that had a Costco and an Applebee's and seeing these suburban constants made me suddenly realize that downtown Austin had signs and businesses as distinct as I'd seen anywhere. The communities I love the most have that same sensibility, a dynamic and a personality that suggests they're creating their own place rather than renting it out. And as it turns out, a culture that nurtures individuality attracts venture capital.

Venture capital flows to communities that nurture differences and invest in longshots, not to protect people and startups but to help them to adapt and eventually succeed. Failure isn't feedback that you shouldn't have tried something; it's feedback that you have to try something different.

To make a startup work you need lots of things to go right. If you are distrustful of people you will inevitably find someone among the senior staff, employees, other investors or suppliers or competitors who you don't trust with your money. People and communities that make money investing in startups err on the side of investing too freely, not too cautiously. If you make home loans, you expect most of the loans to be paid back; if you invest in startups, you expect most to fail. Venture capital is very different from other forms of capital in its tolerance for failure and encouragement of individuality, for creating something new and disruptive. Making home loans is something a conservative investor would do; you can't be conservative with your money and invest in startups.

As it turns out, there is a high correlation between how much venture capital a city attracts and how liberal are its politics. The ability to attract venture capital and liberals comes from the same culture that depends on a willingness to pool an investment into an uncertain future.

On this list of the ten cities that attract the most venture capital are some of my favorites. (I'd replace Redwood City with Boulder, CO but ...) Culture is a big reason why and can be explained by a curious game that's been played as an experiment in cities around the world.

The game
Four people start out with $20 each. They put $0 to $20 into a common pool. Money in this pool is doubled and then divided equally between them, each one getting 1/4. If nobody puts any money into the pool, everyone starts with $20 and ends with $20. If everybody puts all $20 into the pool, everyone starts with $20 and ends with $40.

Freeloaders screw up the game. If two guys hold back their $20, they still get 1/4 of the common pool. So imagine two guys put their $20 into the pool. That combined $40 is doubled to $80 and then divided between the four players. So everyone gets $20 back. But the freeloaders still have their original $20 ($20 they never put into the common pool), so they end the game with $40 while the folks who put money in only get $20. Freeloaders come out ahead.

Is it best to hold back from the common pool or put your money in? It depends on what other people do. That is, it depends on the culture of the group you're in.

If you think that others will hold back, you had better hold back because they're just taking your money. If you think that others will put everything in, you should put everything in because then you all enjoy more. You do best by doing what other people are doing. (And you, of course, do best of all when everyone is putting everything into the common pool, when there are no freeloaders.)

In Boston and Copenhagen, the average amount that people put in is about $18, or most of their $20. These are places that have great public sectors (wonderful schools, aesthetic communities, and strong social programs) and thriving investment and business sectors that support high incomes. The culture encourages shared investment and the community enjoys a shared return.

By contrast, in Athens the average amount people put into the common pool is $6, or very little of their $20. Greece had foreign rule for a long time and it seems to have bred a culture of distrust of government (or more broadly, the common good). Greece has poor schools and social programs and a struggling investment and business sector.

Boston has higher income, Copenhagen higher levels of reported happiness and Athenians report low levels of happiness and income. (Copenhagen was the fifth happiest city in the world per a recent report, and Athens 121st. Boston was 23rd on the list of 186 happy and not so happy cities.)

The cities that thrive the most are cities with win-win cultures where people in both the private and public sectors are willing to invest to create something new. They are open to new people, new ideas and new business ventures. They are comfortable with creative disruption because their goal is not conformity. They know that some investments (whether investments in people in the form of education and social programs or in businesses in the form of venture capital and R&D) will become miserable failures but also know that investment is how you generate returns. These communities are willing to invest more money into startups and the children of poor, single mothers, funding more startups and voting more Democratic than other parts of the country.

I know that cultures that share respect for the common good have higher quality of life and incomes. I don't know how you change cultures, though, once people within them are rationally doing what makes sense given what everyone else is doing. That is, strong support for investing in uncertain outcomes seems instrumental to prosperity and that - in turn - depends on trusting your neighbors. But if you live in a community where that culture doesn't exist it isn't clear how you change. The question of how you do seems like a really important question.

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