Editor’s note: The RTP Product Pipeline is a new feature for WRAL Local Tech Wire. Its purpose is to help entrepreneurs, business leaders, educators and inventors better understand the product commercialization process. Montie Roland and Thomas Vass are co-founders of The RTP Product Development Guild, Inc. The purpose of the Guild is to provide consultancy services to startups and small companies across a wide variety of specialties. Guidance will focus on commercializing product ideas and technology. Roland is president of the Carolinas Chapter of the Product Development Management Association. Vass is an investment advisor and owner of Private Capital Market, an Internet-based private equity firm. Their column will appear weekly.

RESEARCH TRIANGLE PARK — In his book, "The Mystery of Capital," comparing economic development initiatives around the world, Hernando DeSoto emphasizes the rule of law and private property rights as the two essential ingredients to North America’s economic success.

When he compared North America’s economic model with other models, he asked the main question: why does the model work in North America and not other continents? He could have easily asked the same thing about metro regional economies.

He was exactly right to emphasize the rule of law and private property, but there are two more ingredients related to the working of the private capital markets that could be included in his formula for success: The Rule of Trust and the 50-mile rule.

The Rule of Trust acts as the bedrock underneath the rule of law. In other words, a region could easily have written rules and laws, but if law and rule evasion are rampant, then the rule of law has no economic effect. The two most important components of the rule of trust in private capital transactions involve mutuality and reciprocity between all participants to a capital transaction.

When the two components are present, deals can get done. When they are not present, the damaging effects last for decades. That is one reason why the lying and scheming in the Enron case were so pernicious to America’s capital markets.

Everyone in the public capital markets trusts companies to tell the truth and be trustworthy. It involves an unwritten code of honor that we see each other as equals and depend on each other to tell the truth. We exhibit mutuality in our equal and fair treatment of each other and do not see each other as means to an end.

Reciprocity means that if we do a transaction today, that we can honor and trust the other individuals to reciprocate in the future. Reciprocity allows for deals to be completed over the long period of time that it takes to obtain a capital market exit. This type of reciprocity is different than contract obligations that specify the exact terms and conditions of a deal. Doing a private capital market deal means high risk and uncertainty that cannot be reduced to a contract. We depend on the culture of honor that the other person will reciprocate when the time comes.

Both trust and honor, and another ingredient, knowledge creation, occur within the 50-mile boundary of a metro region. Part of the reason for the 50-mile rule is that knowledge about technology is local and depends on face-to-face communications. Each region has its unique technological structure, which some economists call an industrial cluster. Within the cluster, engineers and scientists meet to solve problems, but not usually in the lab or office. Most knowledge is created and diffused in social networks.

When technological knowledge is shared in these social networks, there is a slight chance that a new idea may be commercialized. If the new idea happens to find capital to fund the deal, a new venture may get born. But, there is no free market guarantee that this desirable outcome will occur.

The successful commercialization of new technology involves all the ingredients in one place and at one time to be in place over an extended period of time.

It is a very rare combination of circumstances and depends on a unique configuration of cultural values and social rules of behavior. And, it is the primary reason why angels and venture capitalists generally only invest in deals located within 50 miles of their metro regional boundaries and the major reason why some metro regions have a better success rate of new venture creation than others.