Casual observers regard the emergent relationships between a venture capitalist and a product-development entrepreneurial firm, as most typically observed in Silicon Valley, as nothing more than the supply of risk capital to an independent-minded entrepreneur. This chapter argues, however, that the truly unique role of venture capitalists is found in their information-mediating and governance functions, which can be understood only in the context of relationships between the “clustering” of entrepreneurial firms and (a club) of venture capitalists.

As described in Section 1 of this chapter, the venture capitalists usually retain control blocks of shares in the entrepreneurial firms and exercise a broad range of governance roles in them, unless entrepreneurs have sufficient funds of their own at the outset. This does not mean that the entrepreneurs of product-development firms play a less autonomous role in information processing. Indeed, they are far more autonomous and innovative in the production of knowledge than the traditional research and development organizations within established firms. Also, their potential products can often be substitutes, so that the competition among them is fierce. However, as Saxenian (1994) documented, there is also a substantial degree of information sharing across those entrepreneurial firms. The clustering of entrepreneurial firms in Silicon Valley does not seem to be accidental. How do these ostensibly contradictory characteristics – competition in information processing on the one hand and information sharing on the other – coexist as a coherent system, say, as the Silicon Valley model?