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The importance of social networks for a start-up

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gearsDoes physical proximity have an impact on ones ability to network and collaborate?  There are many examples that suggest that it does.  Yahoo! made headlines recently for banning home working, with the aim of improving collaboration between employees by having them all under one roof.  This is also a central premise behind the appeal of industry clusters.  From Silicon Valley to the City of London, clusters appeal because they place large numbers of like-minded firms together in one place, where network advantages help companies to flourish.

Some new research investigates the potency of this clustering affect, and whether it can be replicated by the virtual networks people maintain, even when they physically leave that cluster.  It's a phenomenon they refer to as inherited agglomeration effects.

They found that the important network affects for a start-up were not where they were physically located, but the virtual network of contacts they could call upon to help them.  Actual location was not at all important, with the benefits of a good network proving portable to other locations.

“You would think that staying in the financial center would help, because you would remain close to the industry, to other people,” says researcher Evan Rawley. “But we found that in the context of hedge funds inherited agglomeration effects are derived not from social capital but from knowledge, which for portfolio managers includes trading strategies, and operational knowledge.”

The study found that the early employment history of the entrepreneur was more important than where they chose to locate their new business.  This was because the benefits of locating in a industry cluster were offset by the high levels of competition in that area.  The prior experience gained in their early employment however, together with the networks they established there, stood them in good stead with their new business.

The findings are good news for people looking to start a knowledge business in an un-fashionable area, but perhaps less positive for policy makers looking to establish new hubs, such as the TechCity hub in east London.

Republished with permission