Y Combinator puts company founders in one location because face-to-face communication is best for solving complicated problems (such as building a software application). Proximity is also essential for Y Combinator's principals to monitor their investments, provide advice and mediate disputes among founders.
Another example is Foo Camp. Founded by Tim O'Reilly, Foo Camp is an annual gathering of smart people doing interesting work in a variety of technology fields. Foo Camp helps innovators connect through the lowest of low-tech communication methods: live presentations in front of live audiences.
A recent Deloitte & Touche survey on global VC investing also speaks to the power of proximity. 54 percent of U.S.-based VC companies do not have foreign investments, and 74 percent of those have no plans to invest overseas in the near future. These numbers are interesting given the increased pace of globalization and the billions of tech-hungry consumers emerging in China, India and elsewhere around the world.
Of VCs that do invest overseas, the report states "51 percent invest only with other investors who have a local presence." That's because the VCs want to be physically close to the companies they are investing in, in part because it helps them manage these companies, but also because a local presence provides better knowledge of the culture and environment in which the companies are situated.